Draghi’s First Good News in a Year Has $267 Billion Cost

  • Bloomberg survey sees ECB inflation outlook stable or higher
  • Draghi holds press conference June 2 after ECB meets in Vienna

Mario Draghi, president of the European Central Bank

Photographer: Martin Leissl/Bloomberg

Mario Draghi may have bought himself a brief respite from the threat of deflation. The cost? More than a quarter of a trillion dollars.

On Thursday, the European Central Bank president should be able to deliver his first snippet of good news for a year on his mandate. Most economists in Bloomberg’s monthly survey predict the central bank’s forecasts for inflation and growth will be left unchanged or increased. Yet respondents see the relief as short-lived, with two thirds predicting more easing will eventually be needed.

The poll results underscore how the Governing Council’s meeting in Vienna, one of the occasional sessions held outside the ECB’s Frankfurt headquarters, is likely to mark a pause for officials after a fresh round of stimulus in March that included a bump of 240 billion euros ($267 billion) to their bond-buying program. While economists are skeptical the package will be enough to return inflation to the target of just under 2 percent, Vice President Vitor Constancio is more optimistic. He said last week that he believes consumer-price growth will be near that goal in two years time.

“The combined economics departments of the Eurosystem central banks must be sighing in relief over this round of forecasts,” said Anatoli Annenkov, an economist at Societe Generale in London. “They have a rare opportunity to forecast higher inflation.”

After ECB staff lowered their euro-area inflation projections in each of their last three quarterly forecasting rounds, just 9 percent of economists surveyed predict a cut for the 2016 and 2018 calculations at this week’s meeting. Eleven percent see a lower 2017 prediction.

More Coming?

The gathering in Austria takes place against a backdrop of growing concern among investors that central banks have run out of ways to bolster feeble prices. Before the meeting, fresh data should give officials more insight into how well the existing stimulus is working. 

Eurostat will probably say on Tuesday that the inflation rate rose to minus 0.1 percent in May from minus 0.2 percent the previous month, and unemployment was unchanged at 10.2 percent in April, according to separate Bloomberg surveys. Brent crude, up more than 75 percent since January, is being closely watched for its impact on consumer prices.

The inflation rate in Germany, the region’s largest economy, unexpectedly climbed to zero in May, data showed on Monday. That’s above the median estimate for a reading of minus 0.1 percent in a Bloomberg survey of economists, and compares with minus 0.3 percent in April. A European Commission gauge of euro-area economic confidence rose for a second month to a four-month high.

That could all help lift the ECB’s previous projections, published in March, which foresaw inflation averaging 0.1 percent in 2016, 1.3 percent in 2017 and 1.6 percent in 2018.

Still, achieving the inflation goal any time soon remains a tall order. Core inflation, which the ECB says is a gauge for future price developments, slowed to 0.7 percent in April and is seen barely picking up to 0.8 percent in May. Euro-area negotiated wages rose a nominal 1.4 percent in the first quarter, the slowest pace since the inception of the single currency a decade and a half ago.

“We expect continued slow growth and weak core inflation to see the case for additional loosening build through the course of this year,” said Andrew Wishart, an economist at Capital Economics Ltd. “At April’s meeting, the Governing Council noted their concern over the divergence between still-low inflation expectations and rising oil prices, and a growing perception that monetary policy has reached its limit and can no longer boost growth.”

A key concern for the 25-member Governing Council is whether a failure to hit its inflation target for more than three years is undermining its credibility. Draghi will probably reaffirm the central bank’s commitment to take new measures if necessary, while stopping short of any new pledges for now.

The 67 percent of respondents to the survey who see more easing on the way is up from 61 percent in April’s survey. Just over half of those economists predict a fresh announcement at the Sept. 8 meeting.

The March decision saw quantitative easing increased to 80 billion euros a month from 60 billion euros, starting in April and running through March 2017. A further extension of asset purchases past that end-date is still seen as the most likely form of additional stimulus, though there are growing concerns that some countries will start to run out of eligible bonds. The ECB has said it sees no sign of shortages under current parameters for QE.

Among respondents who expect more easing, 84 percent said the ECB will buy assets for longer, down from 96 percent in April. Forty-two percent said the central bank will further cut its deposit rate, compared with 36 percent in the last survey. Just 16 percent said the central bank will expand QE above its current monthly target of 80 billion euros.

“The ECB is in wait-and-see mode,” said Alan McQuaid, chief economist at Merrion Capital Group Ltd. in Dublin. “Unless headline inflation and inflation expectations pick up over the summer months, then there is every chance we will see the ECB move again.”

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