Draghi’s data jigsaw takes shape as ECB readies policy showdown
Scott Hamilton & Kristian Siedenburg
Mario Draghi’s month-long audit of the euro-area economy will enter a critical phase this week as officials finalize forecasts and data show whether inflation is becoming too scarce for comfort.
With 10 days left for the European Central Bank president to make up his mind before the next policy decision, reports from German sentiment today to region-wide statistics at the end of the week are among pieces he can add to the puzzle of the economy’s outlook. Feb. 28 figures will probably show inflation matched the lowest since 2009, according to economist estimates.
On Feb. 6, Draghi cited the need for “more information” to explain why the ECB hadn’t added more stimulus yet, heralding a month of scrutiny on data that have veered between growth outperforming economist forecasts to a deterioration in survey indicators. He repeated yesterday that officials are “ready to take any action,” setting the scene for a showdown next week as they determine if the economy’s prospects are sickly or safe.
“You could potentially see a trigger this week for ECB action,” Nick Kounis, head of macro research at ABN Amro Bank NV in Amsterdam, said in a telephone interview. “The inflation numbers could really be the deciding factor.”
Inflation in the 18-nation euro area held at 0.7 percent in February, the median of 39 forecasts in a Bloomberg News survey of economists shows. Kounis’s 0.5 percent prediction is the lowest along with Capital Economics Ltd., while DekaBank has the highest estimate at 0.9 percent.
The European Union’s statistics agency will release those data at 11 a.m. on Feb. 28 in Luxembourg, at the same time as jobless numbers. Unemployment probably stayed at 12 percent, close to a record high, economists’ forecasts show.
Before those releases, reports from Germany will cast light on the state of Europe’s biggest economy. The Munich-based Ifo institute will say today that business confidence stayed close to the highest in more than two years this month, while inflation due on Feb. 27 probably eased to the slowest since April, according to surveys of economists.
ECB staff will consider such information as they finish preparing quarterly economic forecasts for next week’s decision. That outlook will for the first time encompass a three-year horizon with inflation and growth estimates for 2016.
“With the inflation rate falling until recently, the ECB will probably lower its inflation projections,” said Michael Schubert, an economist at Commerzbank AG in Frankfurt. “This suggests further monetary easing remains an option.”
The ECB’s debate on whether to act or not centers on the risk of deflation. Executive Board member Benoit Coeure said in an interview with Slovenian newspaper Delo that the euro region is “closer to the area where inflation expectations could be altered and create downside risks to price stability.”
Draghi, speaking yesterday after a Group of 20 meeting in Sydney, also mentioned the ECB’s focus on consumer-price risks.
“We don’t have any evidence of people postponing their expenditure plans with a view to buying the same thing at lower prices, in other words we don’t see what is defined to be deflation,” he said. The ECB “is willing and ready to take any action in case these risks were to gain strength.”
A deterioration of market-based gauges of inflation expectations has added to the ECB’s quandary. The German 5-year breakeven rate fell to 0.79 percentage point on Feb. 21 from 0.98 percentage point in mid-January. Professional forecasters surveyed by the ECB also lowered their outlook for consumer prices this month, predicting inflation to average 1.1 percent in 2014, 1.4 percent in 2015 and 1.7 percent in 2016.
Officials preparing for the March 6 decision are discussing how they might act at a time when the ECB’s main interest rate is already at a record-low 0.25 percent. Any further move may need to include a cut in the deposit rate below its current level of zero.
ECB Governing Council member Jens Weidmann, who heads Germany’s Bundesbank, yesterday described that prospect as “uncharted territory.” Speaking to Bloomberg News in Sydney, he signaled more openness to pausing sterilization of the ECB’s now-terminated bond-purchase Securities Markets Program, saying that he “wouldn’t rule out'' such a move.
“We’ve really seen quite tight conditions in the money market which we think is likely to trigger the end of the SMP sterilization in March in any case,” Kounis said. “The big debate now I think is whether or not that step is likely to be accompanied with a rate cut.”
Some data have eased pressure on the ECB to do anything. The Feb. 14 gross domestic product report showed the euro-area economy expanded 0.3 percent in the final quarter of 2013, more than economists forecast. While Markit Economics’s factory and services surveys showed a loss of momentum this month, they still signaled expansion.
ECB Governing Council member Ewald Nowotny last week suggested he opposes to action for now, saying that inflation may “self-correct” as the economy improves.
“It’s finely balanced, because some people will say the money markets have calmed, verbal intervention has been sufficient and a small refi-rate cut won’t have that much of an impact,” said James Ashley, an economist at RBC Capital Markets in London. Still, “the past two months of inflation probably are enough for the staff projections to be revised down and it’s probably enough to argue for more action.”