Saturday October 25, 2014 Search
Weather | Athens
19o C
12o C
News
Business
Comment
Life
Sports
Community
Survival Guide
Greek Edition
Dwindling inflation puts pressure on ECB

By James Saft

Never a hot-bed of monetary policy activism, the European Central Bank may soon find itself forced into an uncomfortable period of experimentation.

At issue is inflation, or rather its increasing scarcity: eurozone inflation fell at its fastest ever month-on-month pace in January, down 1.1 percent from December. Only three small countries, Estonia, Slovakia and Latvia, saw consumer prices rise in the month, with the rest flat or in outright deflation. Annual inflation came in at 0.8 percent, far below the ECB's 2.0 percent target and slightly below economists' expectations.

Indeed with Germany seeing a month-on-month decline in prices, the supposed contrast between a healthy core and sclerotic periphery is harder to see, at least in inflation terms.

"The disinflation trend is broad-based across the eurozone. All countries are contributing to lower inflation. It is not just the internal devaluations of program countries that are pushing euro zone inflation down,» Andrew Bosomworth of Pimco wrote in a note to clients, referring to countries like Greece and Ireland which are following programs of economic reform which have wage, living standard and price compression as unwanted side effects.

Just think what might happen to prices if France and Italy were to some day actually launch the economic reforms they've been threatening these many years.

So far ECB head Mario Draghi, using a narrower definition of deflation, is sounding not exactly like a man ready to pull the trigger on rate reductions or other extraordinary monetary policy.

"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,» Draghi told reporters in Sydney on Sunday after a meeting of the Group of 20 nations.

"We are aware of the risks. The Governing Council is willing and ready to take any action in case these risks were to gain strength."

Early estimates of February inflation will be released on Friday, setting the stage for the next ECB policy meeting on March 6, at which time it will also publish longer-term inflation forecasts for the first time. Financial markets show investors see a 10-basis-point reduction of key ECB rates by mid-year as about a 50-50 proposition.

Even so, if we have learned anything during the past six or so years it is that the dominant central banks on either side of the Atlantic make quite a contrast. Where the Federal Reserve is impatient and quick to move, the ECB, while certainly innovative in tough times, seems more inclined to taking the advantage of time before deciding.

All of which may leave us somewhat surprised if the ECB does react strongly, in no small part because some of the measures it may take will seem radical. One, paying, or charging, a negative interest rate on short-term deposits it holds, would form an incentive for banks to lend or hold riskier instruments, but is unlikely in and of itself to make a huge difference.

Some, particularly the direct buying of bank loans from banks, may also have some key advantages over QE as it has been practiced in the U.S.

While the ECB would prefer to stay away from buying government bonds, which many argue would violate its governing treaty which prohibits monetary financing, the alternatives present their own difficulties.

There simply isn't a big enough and liquid enough asset-backed and covered bond market to give scope for purchases with enough oomph to be meaningful. And while European banks have huge balance sheets full of loans, and good reason to want to offload them and shore up capital, the ECB may not have the expertise needed to negotiate, purchase and manage a huge loan portfolio.

That said, buying loans could work quite well in a European context. Europe is more dependent on bank financing, as opposed to capital markets, than is the U.S., making loan purchases more likely perhaps to stimulate the real economy, as opposed to simply goosing prices in financial markets.

And while the red line of monetary policy in the U.S. is «picking winners» within the economy, which such a program arguably would do, in Europe the taboo is more about financing governments.

Even if the ECB went for credit easing, as buying bank loans can be called, it will have a hard time buying enough. With money supply in the eurozone about 1.4 trillion euros short (by Pimco estimates) of its pre-crisis trend, the ECB will need to buy a whole heck of a lot of something to address the inflation drought.

Innovative as it may become, to achieve that scale of stimulus will be hard without buying government debt, taboo as it may be.

(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund.)

[Reuters]

ekathimerini.com , Tuesday February 25, 2014 (10:59)  
Tension for tension’s sake?
Testing ground
Defusing a crisis
PM needs to step up
Athens, Nicosia satisfied by EU leaders´ stance toward Ankara
A reference in Friday’s European Council conclusions calling on Turkey to respect Cyprus’s sovereign rights left Athens and Nicosia content with the outcome of the European Union leaders’ su...
Suspended policeman chief suspect in cousin’s murder
A 27-year-old police officer who has been suspended from duty since 2013 for extortion, is being treated as the chief suspect in a murder committed in a suburb of Piraeus on Thursday. Police...
Inside News
TAIPED waits for green light from Eurostat
Eurostat has frozen the securitization of properties that the Hellenic Republic Asset Development Fund (TAIPED) had been planning. The project, drafted to bring some 400 million euros into t...
Trade deficit shrinks on big drop in imports
Greece’s trade deficit shrank 29.5 percent year-on-year in August as a result of the considerable 16.3 percent decline in imports, Hellenic Statistical Authority figures revealed on Friday. ...
Inside Business
BASKETBALL
A win is a win is a win for Olympiakos
A bad Olympiakos defeated a worse Laboral Kutxa 63-57 to make it two out of two in the Euroleague on Friday. In a game where the two teams had an overall field goal rate of about one in thre...
SOCCER
Panathinaikos snatches point at Eindhoven
Panathinaikos offered its fans a glimpse of its glorious past in European competitions snatching a draw at PSV Eindhoven, on an otherwise bad night for Greek soccer in the Europa League, as ...
Inside Sports
SPONSORED LINK: FinanzNachrichten.de
SPONSORED LINK: BestPrice.gr
 RECENT NEWS
1. A win is a win is a win for Olympiakos
2. TAIPED waits for green light from Eurostat
3. Trade deficit shrinks on big drop in imports
4. SMEs unable to claim subsidies
5. Taxes kept growing in second quarter
6. Thessaloniki Port expects 2014 to be record year
more news
Today
This Week
1. Woman killed in tram accident in Floisvo, south of Athens
2. Clocks to go back 1 hour on Sunday
3. Venizelos slams Turkey for 'flagrant violation of international law' off Cyprus
4. ECB vies for third time lucky in European stress tests
5. Cyprus GDP upgrade seen as boosting bailout exit plans
6. ECB bank assessment to show 6-billion-euro capital gap, Citi says
Today
This Week
1. The past, present and future of the Greek debt crisis
2. Greece’s closed society is central to its current malaise
3. Greece must stick to reforms, says Schaeuble
4. At least 11 banks to fail European stress tests, three in Greece, report says
5. Cyprus to block Turkey's EU talks after EEZ violation
6. Samaras’s crumbling Greek exit lacks backing from economists
   Find us ...
  ... on
Twitter
     ... on Facebook   
About us  |  Subscriptions  |  Advertising  |  Contact us  |  Athens Plus  |  RSS  |   
Copyright © 2014, H KAΘHMEPINH All Rights Reserved.