Draghi's Get-Out Clause Found in Forecasts Allowing for Optimism

Updated on
  • ECB said to cut price outlook but boost forecast for growth
  • Governing Council meets to discuss stimulus plan on June 7-8

The European Central Bank’s chief economist may have found Mario Draghi a way out of his latest stimulus dilemma.

The ECB will cut its inflation outlook through 2019 because of weaker energy costs, while raising forecasts for economic growth, according to euro-area officials familiar with the matter. Such projections, to be presented by Executive Board member Peter Praet at this week’s policy meeting in Tallinn, could allow the president to acknowledge the region’s new-found strength without encouraging an unwarranted tightening in market conditions.

Almost three-quarters of the way through his eight-year term, Draghi is being warned by colleagues that the ECB’s credibility is at stake if it doesn’t change its policy language soon. Yet with this year’s early surge in consumer prices already fading and core inflation still feeble, many Governing Council members are urging extreme caution in communicating -- let alone implementing -- any stimulus withdrawal.

“It would give Draghi additional legroom to be patient in the months ahead,” said Maxime Sbaihi, an economist at Bloomberg Intelligence. “The 2019 figure is the most scrutinized because it reveals the ECB’s own opinion on its capacity to meet its inflation target over the medium-term horizon. Any downward revision on that specific year could rightly be interpreted as additional caution and time in the ECB’s road to policy normalization.”

The ECB’s draft projections now show consumer-price growth at roughly around 1.5 percent each year in 2017, 2018 and 2019, the officials said, asking not to be identified because the information is confidential. That compares with previous projections in March for rates of 1.7 percent, 1.6 percent and 1.7 percent, respectively.

The euro slid as much as 0.7 percent to an intraday low on Wednesday after the news, reflecting the importance to investors of the inflation outlook for gauging policy.

Predictions for economic growth are likely to be revised up by about a 10th of a percentage point, the officials said. The March projections saw gross domestic product rising 1.8 percent this year, 1.7 percent in 2018 and 1.6 percent in 2019.

The outlook will be presented to the Governing Council at its two-day meeting in the Estonian capital that started Wednesday, and the numbers aren’t final until they are published on Thursday. A spokesman for the ECB declined to comment.

The latest projections will cap a period of several months in which pressure for the ECB to send stronger signals on its stimulus plans has mounted. Consumer-price growth climbed as high as 2 percent in February, stoking calls in nations such as Germany to end bond purchases and start raising interest rates, but slowed to 1.4 percent in May and missed economists’ forecasts. The ECB’s goal is to achieve an inflation rate of just under 2 percent that can be sustained over the medium term without monetary support.

Fluctuating oil prices haven’t helped, with Brent crude currently trading below $50 a barrel after climbing as high as $57 early in the year.

Confidence Rising

Officials have still acknowledged that the risk of deflation has virtually disappeared, and recent economic data has shown accelerating growth and confidence measures near a decade-high. Executive Board member Benoit Coeure has said that the ECB would pay a “high price in terms of our credibility” if it fails to adapt its guidance when it changes its views on the outlook.

Economists surveyed by Bloomberg last week said the most likely outcome of Thursday’s meeting is for Draghi to state, for the first time in his presidency, that the risks to growth are balanced instead of skewed to the downside. That change in tone was predicted by 90 percent of respondents.

A change to the central bank’s forward guidance was considered much less likely, and none predicted any immediate change to interest rates or the size of the asset-purchase program.

The ECB currently intends to buy 60 billion euros ($68 billion) of bonds a month until the end of December, and says it will increase the pace or duration of purchases if needed. It also says interest rates -- the deposit rate is at minus 0.4 percent -- will be kept at current or lower levels until well after the end of net asset purchases.

More likely, according to the survey, is that the ECB makes an announcement on the future of quantitative easing at its September meeting, backed by another round of projections, or later.

If they do revise down the inflation outlook, “the risk is that a tapering announcement will be delayed to October or even December, before all criteria are met,” said Frederik Ducrozet, an economist at Banque Pictet & Cie in Geneva.

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