Wednesday Jul 30, 2014 Search
Weather | Athens
31o C
24o 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)  
Deals reached for twin plot on Afandou, for 42 million
More delays and red tape for companies’ tax rebates
Greek shipowners continue to invest in fleet renewal
Trainose sale is not on track
Troika review in Athens unaffected by Paris meeting
A meeting between troika and Greek government officials in Paris at the beginning of September does not mean that representatives of Greece’s lenders will not then travel to Athens to carry ...
Soldiers set to sue over wages
Members of the armed forces and emergency services look set to take legal action to have their wages restored to pre-2012 levels after the government suggested it would not raise their pay t...
Inside News
VOLLEYBALL
Volleyball national team second in European League
Much as the national volleyball team tried to repeat in the finals of the European League the feat it had achieved in the semifinals, it failed to overturn the advantage Montenegro had got f...
SOCCER
Ranieri says he has little to change in Greek national team
The Hellenic Football Federation (EPO) presented Claudio Ranieri as the new Greece coach for the next couple of years, after the Italian manager signed his contract in Athens on Friday. “I l...
Inside Sports
COMMENTARY
Through insecurity comes optimism
Prime Minister Antonis Samaras recently expressed his optimism regarding the quota of 180 Parliamentary deputies required for the election of Greece’s next president, in order for the countr...
EDITORIAL
Futile policy
The policy that Israel has been pursuing vis-a-vis the Palestinians is wrong and futile. Current tactics have failed to resolve the security issue and, at the same time, they are rapidly dra...
Inside Comment
SPONSORED LINK: FinanzNachrichten.de
SPONSORED LINK: BestPrice.gr
 RECENT NEWS
1. Deals reached for twin plot on Afandou, for 42 million
2. More delays and red tape for companies’ tax rebates
3. Greek shipowners continue to invest in fleet renewal
4. Trainose sale is not on track
5. Industry asks for gov’t intervention
6. Troika review in Athens unaffected by Paris meeting
more news
Today
This Week
1. Greece names fifth privatization agency chief in four years
2. Archaeological council bans international climbers' gathering at Meteora
3. World’s largest solar boat on Greek mission
4. Venizelos to meet Nimetz in Athens
5. Tsipras discusses Cyprus with Anastasiades in Athens
6. More than 120,000 households to receive special benefit
Today
This Week
1. Unequal after death
2. Greek sovereign debt at 174.1 percent of GDP in first quarter
3. Hedge fund Dromeus turns Greek tragedy to triumph with 160 pct gain
4. Quadriplegic woman on life support 'dies due to unpaid power bills'
5. Front-line threats
6. Defense Minister Avramopoulos to represent Greece at European Commission
   Find us ...
  ... on
Twitter
     ... on Facebook   
About us  |  Subscriptions  |  Advertising  |  Contact us  |  Athens Plus  |  RSS  |   
Copyright © 2014, H KAΘHMEPINH All Rights Reserved.