Draghi Gauges Ukraine Effect as ECB Tackles Low Inflation

Mario Draghi can look for clues from euro-area companies this week on whether the region needs more stimulus to counter economic risks from low inflation to geopolitical tension.

Purchasing managers’ indexes tomorrow are forecast to show growth in manufacturing activity holding at the weakest pace this year. Figures the following day may show declining business confidence in Germany, the region’s biggest economy, in a survey published shortly before the European Central Bank president speaks in Amsterdam.

A territorial dispute between Russia and Ukraine, which supply much of Europe’s energy, is undermining confidence in a recovery already threatened by a strengthening currency and subdued pricing power. That raises the prospect of ECB officials being called on their promise to ease monetary policy if needed, including with unconventional tools such as quantitative easing.

Tension in eastern Europe “could easily spark turbulences big enough to temporarily halt the euro-zone recovery,” said Christian Schulz, senior economist at Berenberg Bank in London. “It is the biggest risk to our optimistic growth forecasts for the euro zone at the moment.”

Survey Data

A deadly shootout in Ukraine during the weekend led to renewed calls in the U.S. for economic sanctions against Russia as a diplomatic accord showed little sign of defusing the crisis. At least three people were shot to death in a clash at a roadblock in Slovyansk in eastern Ukraine on April 20, the Interior Ministry said.

Against that backdrop, this week’s gauges of sentiment in the euro area may show signs of caution. A gauge of consumer confidence was probably unchanged in April after fluctuating in the first three months, according to a Bloomberg survey of economists before European Commission data today.

A purchasing managers index of manufacturing activity by Markit Economics Ltd. probably held at 53 this month, the lowest level since December, according to a separate survey. A measure of services activity may have advanced to 52.5 from 52.2. Both PMI reports and a composite index will be published at 9 a.m. tomorrow in London.


Royal Philips NV reported today that first-quarter sales fell 5 percent and earnings missed analyst estimates because of the strength of the euro.

There was a “significant currency impact” and “market headwinds in, among others, China and Russia,” said Chief Executive Officer Frans Van Houten. “2014 will be a challenging year, but we remain very confident of achieving our 2016 mid-term financial targets.”

Germany’s Ifo index of business confidence is predicted to drop to 110.4 in April from 110.7 the prior month, according to the median estimate in another survey. The reading declined in March for the first time in five months. The ZEW Center for European Economic Research in Mannheim said last week that its index of German investor confidence fell for a fourth month in part because of the Ukraine conflict.

Ifo business expectations will probably weaken, according to Andreas Scheuerle, an economist at Dekabank in Frankfurt, who cited factors including the stronger euro and an economic slowdown in China.

“The first quarter was so good that companies and financial analysts are lacking the imagination that things can be even better,” he said. “The decisive indicator for monetary policy will be inflation. It will have to go up -- and it will, according to our forecasts -- but if it doesn’t, it would probably trigger action.”

‘Biggest Fear’

Draghi, who said on April 3 that his “biggest fear” is a protracted stagnation in the euro area, will speak at the Dutch central bank an hour after the German report on the topic of “Central banking in the next two decades.”

Addressing the International Monetary Fund in Washington this month, he reiterated that policy makers are “resolute” in their determination to keep monetary policy loose and unanimous in their commitment to use unconventional instruments within the ECB’s mandate if needed. The central bank has kept its benchmark interest rate at a record-low 0.25 percent since November.

While Draghi’s comments open the door to quantitative easing, an imminent announcement is unlikely. ECB Executive Board member Benoit Coeure said in Washington that the fragmented euro area means the large-scale bond purchases favored by the Federal Reserve, Bank of England and Bank of Japan may not be appropriate.

ECB Options

“There is no single yield curve that refers to a ‘commoditized’ reference asset and that is equally relevant for loans to firms and households,” he said. “Creating such an asset would ease the implementation of our monetary policy, but this cannot be a short-term project.”

That leaves the ECB with options including another cut in the main refinancing rate, taking the deposit rate below zero for the first time, and liquidity operations such as offering more long-term loans to banks. The Governing Council’s next meeting to set monetary policy will be on May 8 in Brussels.

Asset purchases have also been discussed by the 24-member council. While the details of any plan are unknown, options range from smaller programs targeting a specific class of securities to an across-the-board mix of private and public debt.

“It’ll be interesting to see whether the ECB will actually start a purchase program, even if a small one,” said Nick Kounis, head of macro research at ABN Amro Bank NV in Amsterdam.

Inflation Outlook

Draghi said in Washington that a stronger euro is undermining the fight against low inflation and a further appreciation could trigger more stimulus. The single currency has gained 5.7 percent against the dollar in the past 12 months, curbing the price of imported goods and the competitiveness of the region’s exporters.

The euro was little changed against the dollar today, trading at $1.3820 at 2:42 p.m. in Frankfurt.

The strong euro justifies the ECB’s accommodative policy, Coeure said in an interview with France’s Le Monde newspaper published today, adding that euro appreciation since 2012 contributed to the current level of low inflation the currency’s appreciation since 2012 contributed to the current level of low inflation.

‘Genuine Surprise’

Euro-area inflation was 0.5 percent in March, the weakest rate in more than four years, compared with the central bank’s goal of just under 2 percent. Five of the 18 euro-area countries saw prices fall year-on-year and just three -- Austria, Finland and Malta -- had inflation of more than 1 percent.

This month’s data will be published on April 30. While Draghi has said the March rate was a “genuine surprise,” he has also stressed that lower energy prices and seasonal factors such as the timing of Easter were a factor.

That suggests the ECB expects inflation to accelerate this month. Brent crude and natural gas prices have rebounded amid the Ukraine crisis, and the Easter holiday that started April 18 should have boosted tourism and travel-related costs.

“The ECB hopes that monetary policy in the euro zone will become very boring very quickly,” said Richard Barwell, senior economist at Royal Bank of Scotland Group Plc in London. “But April inflation will be critical looking forward. If it doesn’t bounce, it’s the thing that might force them to act.”

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