Bundesbank Support for ECB Stimulus Said Not Automatic

The Bundesbank’s support for any more stimulus for the euro area won’t be automatic even if the European Central Bank cuts its inflation forecast for 2016, two people with knowledge of the matter said.

While the German central bank will focus on the outlook for price stability at the end of the ECB’s forecast horizon and is open to a package of measures from a negative deposit rate to halting the sterilization of crisis-era bond purchases, nothing is decided yet, said the people, who asked not to be identified because the matter is private.

ECB President Mario Draghi said last week that the Governing Council is “comfortable” about taking action at the June 5 monetary policy meeting, when it will publish revised macroeconomic projections. The Wall Street Journal reported earlier that the Bundesbank is open to significant stimulus if officials lower their inflation outlook for 2016.

“There is consensus about being dissatisfied with the projected path of inflation,” Draghi told reporters after the May 8 policy meeting, when he kept rates on hold. “There is a consensus in not being resigned to this and accepting this as a fact of nature, which would lead to having consensus about action but, as I said before, after having seen the staff projections that will come out in early June.”

Important Forecasts

The ECB predicted in March that inflation would average 1 percent in 2014, accelerating to 1.5 percent in 2016. Gross domestic product in the 18-nation currency bloc is projected to rise 1.2 percent this year and 1.8 percent in 2016.

“The 2016 forecasts are important although it’s not just about them,” said Nick Kounis, head of macro research at ABN Amro NV in Amsterdam. “I imagine the Bundesbank is comfortable with Draghi’s signal about acting in June, but obviously that doesn’t mean it’s a done deal.”

Draghi has signaled the ECB is closer to stimulus as it battles to revive price growth in the euro area. At 0.7 percent in April, inflation was less than half of the ECB’s goal of just under 2 percent. The rate has been below 1 percent since October. The European Union’s statistics office will release its first estimate for May’s consumer-price gains on June 3.

Concern that the outlook for the economy will worsen was reinforced today by a bigger-than-expected drop in German investor confidence. The ZEW Center for European Economic Research in Mannheim, which aims to predict economic developments six months in advance, said its index of investor and analyst expectations slid for a fifth month in May to the lowest since January 2013.

Multiple Measures

In the wake of Draghi’s comments after last week’s Governing Council meeting, economists from Goldman Sachs Group Inc. to BNP Paribas SA and Citigroup Inc. predicted a rate cut. The main refinancing rate may fall to as low as 0.1 percent from 0.25 percent when policy makers convene next month in Frankfurt, the banks said. The deposit rate may be cut from zero.

Should the ECB decide to act, it might deploy multiple tools rather than just cutting interest rates.

“If you really think you need new measures then it’s probably sensible to do a package instead of a single measure,” Governing Council member Ewald Nowotny said yesterday in Vienna.

The Bundesbank would be comfortable with halting the sterilization of liquidity from crisis-era bond purchases under the Securities Markets Program, according to the two people familiar. That would add about 170 billion euros ($233 billion) to the financial system, reflecting the value of outstanding bonds. Policy makers have so far declined to take that step, with Draghi telling reporters in February that the effects would be “relatively limited.”

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