European Central Bank poise to clinch course in face of deflation panic
April 3, 2014 7:52 am
The European Central Bank seen on poise to maintain interest rates steady and provide no new support to the euro zone’s fragile bounce back on Thursday despite a decline in inflation to its worst in more than four years.
Policymakers have been willing in recent weeks to publicly broach trimming down deposit rates under zero – effectively charging banks to hold cash with the ECB – or embarking on bond purchases as the United States, Japan and Britain have.
A straightforward slash in the ECB’s main refinancing rate to 0.1 percent from 0.25 percent – or more complex alterations to current market programs – are other probabilities.
But there has been small sense that a majority of leaders favors imminent utilization of any of those tools even though inflation has been under 1 percent for six months. Rather most may choose to maintain such policies on standby in case of an external economic shock.
“Policy rhetoric should lean in the direction of dovish. But it is unlikely that current economic and market conditions meet the watermark for ECB action,” said Lena Komileva, managing director of G+ Economics.
News on Monday that yearly inflation in the 18-member euro zone move lower to 0.5 percent appears insufficient to trigger action, despite concerns among some economists that the bloc risks sliding down into a spiral of sagging financial values and meager development.
Even after the data came out, 18 out of 22 money market traders surveyed by Reuters projected no movement in policy, echoing the finding of a bigger Reuters poll of economists last week.
ECB Vice-President Vitor Constancio stated that the low rate of inflation could hamper development but that there was no risk of deflation and that economic recovery would push financial values higher.
The ECB will declare its interest rate finalization at 1145 GMT and ECB President Mario Draghi will explain any further policy decisions at a news conference at 1230 GMT at the central bank’s Frankfurt headquarters.
Draghi is likely to want to play up the ECB’s readiness to discuss downside risks to inflation, in order to stem an increase in the euro, which last month hit its topmost performing mark versus the U.S. dollar since October 2011 and has a dampening effect on import financial values the more it surges.
“A combination of persistent top-line inflation weakness and persistent upward pressure on the euro will probably result in more dovish ECB rhetoric on the central bank’s willingness to fight downside risks to inflation,” Komileva said.
Pressure from abroad to act has mounted, most notably from the International Monetary Fund.
“More monetary easing, including through unconventional measures, is needed in the euro area,” IMF head Christine Lagarde said in a speech on Wednesday, discussing the Fund’s policy propositions ahead of its spring assembly next week.
Last month, the ECB projected it would take 2-1/2 years for inflation to increase to 1.7 percent, which even then would barely reach the goal for yearly financial development below but near to 2 percent.
That was not enough to trigger a majority of policymakers to back more financial stimulus, and to alter their minds now would go versus the central bank’s actions of not reacting to short-term moves in data.
That said, the ECB did slash down its primary interest rate in November after a surprise decline in inflation in October to 0.7 percent.
Other economic indicators are same to last month’s, proposing the ECB outlook that the euro zone will record economic progress of around 1.2 percent this year – the peak mark since 2011 – clinches good.
Nonetheless, there may well be debate on the merits of future stimulus.
One option on the table is trimming down the deposit rate that the central bank pays on the roughly 30 billion euros ($41 billion) deposited with it to under zero – effectively charging banks if they prefer to hold money at the ECB rather than lending it out.
This has been tried out in past few years by the Danish central bank while Switzerland has threatened similar. Such an action could temper the euro but there is less evidence that it would succeed in hiking lending.
Purchasing government assets with newly made currency – as favored on a massive scale by the Bank of England, U.S. Federal Reserve and Bank of Japan – is a trickier prospect for the euro zone even though Bundesbank chief Jens Weidmann, normally a hardliner, has said it would be possible.
Only if deflation really looks like taking hold, will opposition to that be overcome.
The material has been provided by InstaForex Company – www.instaforex.com
The European Central Bank seen on poise to maintain interest rates steady and provide no new support to the euro zone’s fragile bounce back on Thursday despite a decline in inflation to its worst in more than four years.
Policymakers have been willing in recent weeks to publicly broach trimming down deposit rates under zero – effectively charging banks to hold cash with the ECB – or embarking on bond purchases as the United States, Japan and Britain have.
A straightforward slash in the ECB’s main refinancing rate to 0.1 percent from 0.25 percent – or more complex alterations to current market programs – are other probabilities.
But there has been small sense that a majority of leaders favors imminent utilization of any of those tools even though inflation has been under 1 percent for six months. Rather most may choose to maintain such policies on standby in case of an external economic shock.
“Policy rhetoric should lean in the direction of dovish. But it is unlikely that current economic and market conditions meet the watermark for ECB action,” said Lena Komileva, managing director of G+ Economics.
News on Monday that yearly inflation in the 18-member euro zone move lower to 0.5 percent appears insufficient to trigger action, despite concerns among some economists that the bloc risks sliding down into a spiral of sagging financial values and meager development.
Even after the data came out, 18 out of 22 money market traders surveyed by Reuters projected no movement in policy, echoing the finding of a bigger Reuters poll of economists last week.
ECB Vice-President Vitor Constancio stated that the low rate of inflation could hamper development but that there was no risk of deflation and that economic recovery would push financial values higher.
The ECB will declare its interest rate finalization at 1145 GMT and ECB President Mario Draghi will explain any further policy decisions at a news conference at 1230 GMT at the central bank’s Frankfurt headquarters.
Draghi is likely to want to play up the ECB’s readiness to discuss downside risks to inflation, in order to stem an increase in the euro, which last month hit its topmost performing mark versus the U.S. dollar since October 2011 and has a dampening effect on import financial values the more it surges.
“A combination of persistent top-line inflation weakness and persistent upward pressure on the euro will probably result in more dovish ECB rhetoric on the central bank’s willingness to fight downside risks to inflation,” Komileva said.
Pressure from abroad to act has mounted, most notably from the International Monetary Fund.
“More monetary easing, including through unconventional measures, is needed in the euro area,” IMF head Christine Lagarde said in a speech on Wednesday, discussing the Fund’s policy propositions ahead of its spring assembly next week.
Last month, the ECB projected it would take 2-1/2 years for inflation to increase to 1.7 percent, which even then would barely reach the goal for yearly financial development below but near to 2 percent.
That was not enough to trigger a majority of policymakers to back more financial stimulus, and to alter their minds now would go versus the central bank’s actions of not reacting to short-term moves in data.
That said, the ECB did slash down its primary interest rate in November after a surprise decline in inflation in October to 0.7 percent.
Other economic indicators are same to last month’s, proposing the ECB outlook that the euro zone will record economic progress of around 1.2 percent this year – the peak mark since 2011 – clinches good.
Nonetheless, there may well be debate on the merits of future stimulus.
One option on the table is trimming down the deposit rate that the central bank pays on the roughly 30 billion euros ($41 billion) deposited with it to under zero – effectively charging banks if they prefer to hold money at the ECB rather than lending it out.
This has been tried out in past few years by the Danish central bank while Switzerland has threatened similar. Such an action could temper the euro but there is less evidence that it would succeed in hiking lending.
Purchasing government assets with newly made currency – as favored on a massive scale by the Bank of England, U.S. Federal Reserve and Bank of Japan – is a trickier prospect for the euro zone even though Bundesbank chief Jens Weidmann, normally a hardliner, has said it would be possible.
Only if deflation really looks like taking hold, will opposition to that be overcome.
The material has been provided by InstaForex Company – www.instaforex.com
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