Saturday November 22, 2014 Search
Weather | Athens
18o C
10o C
News
Business
Comment
Life
Sports
Community
Survival Guide
Greek Edition
Draghi primes ECB to act as inflation scarcity prompts alarm

By Scott Hamilton

Mario Draghi will confront the threat of deflation this week as he prepares to unleash an array of measures to jolt the economy and ignite prices.

From negative interest rates to conditional liquidity for banks, the European Central Bank president and his colleagues have signaled all options are up for discussion when they meet on June 5. Before then, data tomorrow may reinforce the view that action is needed, with economists predicting a grim mixture of too-low inflation and unemployment near a record.

Draghi has braced investors with warnings on a potential “negative spiral” of prices, and will have new ECB forecasts likely to include a lower outlook for inflation and growth. Those projections will inform talks in the next three days with his management team and then in the wider Governing Council as officials determine how radical a response is needed.

“If you look at the broader array of economic data that is currently out there, then pretty much all of it points to the need for further stimulus,” said James Ashley, chief European economist at RBC Capital Markets in London. “We’re looking at conventional and unconventional steps.”

Of 50 economists surveyed by Bloomberg News, 44 expect the ECB to become the first major central bank to take interest rates into negative territory by cutting its deposit rate. All but 2 of 58 respondents said the benchmark rate would also be reduced.

“We are ready to act,” ECB Vice President Vitor Constancio said on May 30. “We are not complacent about the risks from a protracted period of low inflation.”

Inflation Data

Inflation probably slowed to 0.6 percent in May from 0.7 percent in April, economists said in a separate Bloomberg News survey before the consumer-price report due tomorrow. That would leave it under 1 percent for an eighth month, well short of the ECB’s aim of keeping it just below 2 percent.

The rate may come in weaker than forecast after German inflation today missed estimates. Consumer prices in the region’s largest economy rose 0.6 percent in May from a year earlier, compared with a median prediction of 1 percent in a Bloomberg survey. That’s the lowest in more than four years.

Euro-area unemployment probably stayed at 11.8 percent in April, close to the record 12 percent reached last year, another survey showed. In March, jobless rates across the 18-nation region ranged from 4.9 percent in Austria to more than 25 percent in Spain.

The European Union statistics office in Luxembourg will publish the inflation and unemployment reports at 11 a.m. on June 3. The ECB will announce its latest monetary-policy decision two days later, and Draghi has allowed expectations to build after saying in May that the Governing Council was “comfortable” with acting next time.

LTRO Proposal

The euro was down 0.1 percent at $1.3623 at 2:49 p.m. Frankfurt time, trading near its lowest level in three months.

Aside from the prospect of a negative rate, the ECB is working on a proposal for a conditional longer-term refinancing operation and expects to have a plan ready for the June 5 meeting, according to a central bank official familiar with the plans. Details on cost, maturity and the appropriate measure of credit supply have yet to be finalized, the official said, asking not to be identified because the talks are private.

The so-called LTRO being considered may have a four-year maturity, Der Spiegel reported yesterday, without saying how it obtained the information. It may have a value of 40 billion euros ($54 billion), Frankfurter Allgemeine Zeitung said, citing people familiar with the central bank.

‘Determined to Act’

In addition to providing detail on any new ECB stimulus, Draghi will unveil the new macroeconomic projections. The central bank forecast in March that inflation would average 1 percent this year and 1.3 percent in 2015. Goldman Sachs Group Inc. says it will probably cut its 2014 projection to 0.8 percent. The growth forecast for this year may also be lowered after the economy’s sluggish performance in the first quarter.

Bank of Italy Governor Ignazio Visco last week pointed to the importance of the new forecasts.

“Inflation is expected to remain below 2 percent over the next two years,” he said on May 30. “This is not consistent with our definition of price stability. If this pattern is confirmed, the Governing Council is determined to act, even with unconventional policies.”

GDP Report

Inflation and unemployment statistics are not all that the Governing Council will have to digest this week. An update to first-quarter euro-area gross domestic product will be published June 4, showing how much or little consumers, governments and trade contributed to growth. Data from Markit Economics today showed manufacturing slowed more than forecast in May. Services data will be published on June 4.

Economists including Jacques Cailloux, chief European economist at Nomura International Plc in London, suggest that whatever the outcome of the releases, they are unlikely to derail an interest-rate cut.

“They’ve telegraphed action,” he said. “The speculation is, what will they do on top of the rate cut that’s looking like a done deal?”

Asset Purchases

ECB officials have said they’re working on a package of possible measures, and have held out the prospect of asset purchases as a more powerful option.

Other possible actions include suspending the absorption of liquidity created by crisis-era bond purchases, extending the full-allotment mode for refinancing operations, reducing reserve requirements and changing its collateral framework.

In a Bloomberg survey last month, just 8 percent of economists forecast the ECB will start asset purchases, indicating they don’t see it following the Bank of England and the Federal Reserve down the quantitative-easing road.

While a rate cut could weaken the euro and boost inflation, the more unconventional steps focused on boosting credit and helping the implementation of policy will be more important in terms of the impact on the economy, according to Cailloux.

“None of the measures we expect the ECB to take would be game-changers,” said Marco Valli, an economist at UniCredit SpA in Milan. “But they would help at the margin, especially any funding-for-lending-type move as the transmission of monetary policy is the ECB’s biggest challenge at the moment.”

[Bloomberg]

ekathimerini.com , Monday June 2, 2014 (16:27)  
More cash for banks with same papers
Growth to fuel rise in revenues
Commercial property draws interest from investors
Sony chooses Piraeus as its entry point to Europe
Image of artwork showing humans in blender taken out of schoolbooks
A photograph of a controversial work by a Japanese artist showing people in a blender will be removed from a primary school physics textbook, the Education Ministry said on Friday. The paint...
Simitis supports Venizelos over new movement
Former Prime Minister Costas Simitis on Friday backed PASOK leader Evangelos Venizelos’s proposal to create a new center-left party with the Socialists at its heart. The two men met a day af...
Inside News
INTERVIEW
Tokyo hopes to change the world
The 2020 Summer Olympic and Paralympic Games in Tokyo will serve as a springboard for the rebuilding of Japan’s image and economy following the triple blow of the earthquake, tsunami and nuc...
BASKETBALL
Big win for Greens, tight one for Reds
Panathinaikos scored a crucial as well as emphatic away win at Turow on Thursday that should see it qualify from its tough group to the top 16 of the Euroleague, while Olympiakos saw off vis...
Inside Sports
COMMENTARY
Give Greece a chance
Greece's creditors are testing the country's endurance - again. If they keep pressing, they could split the euro area apart, which would be a disaster for them as much as for Greece. They ne...
COMMENTARY
‘Who lost Greece?’
If, by unhappy chance, Greece’s efforts to create a more efficient economy and more just society should fail, if it turns out that all our sacrifices were in vain, who will be to blame? The ...
Inside Comment
SPONSORED LINK: FinanzNachrichten.de
SPONSORED LINK: BestPrice.gr
 RECENT NEWS
1. Image of artwork showing humans in blender taken out of schoolbooks
2. More cash for banks with same papers
3. Simitis supports Venizelos over new movement
4. Growth to fuel rise in revenues
5. Commercial property draws interest from investors
6. Sony chooses Piraeus as its entry point to Europe
more news
Today
This Week
1. Give Greece a chance
2. Cosco’s Greek unit adds multinational rail-freight client
3. No breakthrough after marathon conference call
4. Israel backs East Med pipeline project
5. Education Ministry mulls over introducing Albanian language classes
6. Greece says EU/IMF lenders disagree with 2015 budget deficit estimate
Today
This Week
1. Double quake on Atalanti fault line rattles Greek capital [Update]
2. Greece and Poland switch roles as young Greeks head to vibrant Eastern European country for better prospects
3. Constructively disrupting the Greek start-up ecosystem: What will the impact be?
4. Anti-junta uprising anniversary to be marked amid tight security
5. Biden heads to Istanbul amid tension over Cyprus EEZ violation
6. Carlsberg takes control of Greek brewer Olympic Brewery [Update]
   Find us ...
  ... on
Twitter
     ... on Facebook   
About us  |  Subscriptions  |  Advertising  |  Contact us  |  Athens Plus  |  RSS  |   
Copyright © 2014, H KAΘHMEPINH All Rights Reserved.