ECB Window for Stimulus Message Closing as Prices Slideby
Last chance for policy speeches before March 10 meeting
February inflation dropped to minus 0.2%, lowest in a year
For the next three days, European Central Bank officials will walk a communications tightrope.
With the latest inflation figures showing the return of price declines, the window of opportunity is closing for the ECB to signal any stimulus intentions for its March 10 decision before a self-imposed quiet period starts on Thursday. Executive Board member Benoit Coeure, the architect of euro-area quantitative easing, will speak in both Frankfurt and Brussels on Wednesday, with hints also possible from his colleague Sabine Lautenschlaeger and national central bank heads.
The stakes are high: bonds slumped and the euro surged the most since 2009 when a policy tweak in December fell short of investor expectations. To avoid a repetition of that, officials must reinforce the refrain that they have the tools to stoke consumer prices and the willingness to use them, without priming markets for action they won’t deliver.
“Governing Council members will be more mindful than ever about how their comments will be interpreted in the run-up to what may be most important meeting this year,” said Timo Del Carpio, European economist at RBC Europe Ltd. in London. At the same time, the ECB is “working hard to dissuade people of the notion that its hands are tied.”
The ECB’s fight against persistently low inflation using negative interest rates and a 1.5 trillion-euro ($1.6 trillion) bond-buying plan has made little visible progress. Euro-area consumer-price growth has fallen short of the goal of just under 2 percent since early 2013.
The inflation rate dropped to minus 0.2 percent in the year through February from a positive reading of 0.3 percent the previous month, according to data published Monday. Core inflation, which strips out volatile food and energy, slowed to 0.7 percent from 1 percent.
The ECB is “in the orange zone, or red zone” when it comes to its inflation mandate, said Jean-Francois Perrin, an inflation strategist at Credit Agricole CIB in Paris. “It will have to do more.”
What “more” it will do won’t be formally agreed on by the Governing Council until the morning of March 10, shortly before the central bank announces its interest-rate decision and President Mario Draghi holds a press conference. That casts the spotlight on this week’s public appearances.
Lautenschlaeger will speak at a risk-management conference in New York. Coeure, who is responsible for the ECB’s market operations, will be at a conference in Frankfurt before traveling to Brussels for a hearing at the European Parliament on a budgetary capacity for the euro zone.
Klaas Knot, the head of the Dutch central bank, will also be at the Brussels hearing. Bank of France’s Francois Villeroy de Galhau, one of the Governing Council’s newest members, will address the French National Assembly’s finance commission on Wednesday. He told Frankfurter Allgemeine Sonntagszeitung that deflation is the main danger facing the euro zone, according to the transcript of an interview provided by his office on Sunday.
“The ECB haven’t really prepped the markets as of yet; they’ve said they need to reconsider the monetary stance but they haven’t given too much away on what that implies,” said Marchel Alexandrovich, senior European economist at Jefferies International Ltd. in London. “Markets expect something to happen, without having a clear idea of what it might be. It’s kind of this blind faith that the ECB will deliver something.”
Traders had too much faith on Dec. 3, leading to a selloff when Draghi announced a “recalibration” of stimulus that extended the duration of QE but didn’t increase monthly purchases beyond the current 60 billion euros.
“The risk is a repetition of a December-type event,” said Fabio Balboni, an economist at HSBC Holdings Plc in London. “There’s a number of things that the ECB can do. To me, the key thing is to then square that with the market expectation.”
This time around, swaps traders fully expect the ECB to cut its deposit rate by at least 10 basis points from the current minus 0.3 percent, based on market pricing. There is far less agreement over whether tiered rates will be introduced to “mitigate the effect on banks” -- a phrase used this month by ECB Vice President Vitor Constancio -- and on any adjustments to the bond-purchase program.
Finance chiefs from the Group of 20 economies who met in Shanghai over the weekend expressed concern that monetary policy has become less powerful, and said their governments will do more to boost global growth. International Monetary Fund Managing Director Christine Lagarde said even the effects of innovative policies are diminishing.
Draghi himself has been relatively quiet. Except for a hearing at the European Parliament, his last public speech was almost a month ago. He said then that low global rates of inflation are no excuse for inaction by the ECB.
The ECB’s chief economist, Executive Board member Peter Praet, said on Friday in New York that that global growth is losing momentum and weakening indicators in Europe are “kind of a warning.” He didn’t give guidance on future policy.
According to Jefferies’ Alexandrovich, investors may have to accept that this meeting carries some significant unknowns.
“There’s almost this kind of big, uncertain, something extra which markets are hoping they’ll get a steer on,” he said. In a situation where the ECB is trying to preserve its flexibility to maneuver, such guidance “doesn’t look likely.”