ECB Weighs Options as Criticism Grows
Posted by hkarner - 2. September 2016
Source: The Wall Street Journal
Some economists expect the ECB to keep its powder dry, pointing to an imminent jump in inflation and mounting criticism of easy-money policies
FRANKFURT—Investors could be in line for a letdown from the European Central Bank next week.
A run of sluggish economic data—including stubbornly low inflation figures published Wednesday—and concerns about Britain’s vote to leave the European Union, have left many investors looking to Frankfurt for fresh stimulus. The ECB is set to hold its next policy meeting on Sept. 7 and 8.
But some economists expect the ECB to keep its powder dry for another three months. They point to an imminent jump in inflation resulting from stabilizing energy prices and they note mounting criticism of the ECB’s easy-money policies—particularly in the bloc’s biggest economy, Germany.
Top ECB officials have been largely silent over the summer. But several have expressed concerns about increasing side effects from their policies, which include negative interest rates and large-scale purchases of government and private-sector bonds.
“The ECB would be keen to do more if they were convinced their medicine is really working. But I think they’re becoming more skeptical,” said Martin Lueck, chief German investment strategist at BlackRock Inc.
ECB officials have indicated they are on high alert in the wake of the Brexit vote, and are ready to provide fresh stimulus to keep the bloc’s modest economic recovery on track, according to minutes of the ECB’s July policy meeting.
So far, the evidence has been mixed. While eurozone consumer and business confidence retreated in August to five-month lows, purchasing managers reported that overall services and manufacturing output rose to a seven-month high. The bloc’s unemployment rate was unchanged at 10.1% in July.
Inflation, though, remains disappointingly weak.
Consumer-price inflation in the eurozone was unchanged in August at just 0.2%, far beneath the ECB’s near-2% target, according to data published on Wednesday. Fresh ECB staff forecasts, to be published next week, are likely to underline the weakened outlook.
Many investors expect ECB President Mario Draghi to respond by announcing a six-month extension of the ECB’s €80 billion-a-month ($89.3
billion-a-month) bond-purchase program, known as quantitative easing, which is scheduled to end in March 2017.
“There would be disappointment if they don’t do anything” next week, said Mr. Lueck.
Crucially, though, inflation is expected to increase over the next three months as energy prices stabilize from a year earlier, rising to 1% for the first time in almost three years.
The ECB may also want more time to assess the impact of recent policy measures such as a series of cheap four-year loans for banks, which were announced in March and are still being rolled out, said Thushka Maharaj, a strategist at J.P. Morgan in London.
At their July meeting, ECB officials warned against “fostering undue expectations about the [ECB’s] future course,” according to the minutes.
Bundesbank President Jens Weidmann, long an opponent of the ECB’s easy-money policies, has said he would oppose any fresh stimulus action from the ECB in response to Britain’s vote to leave the EU.
Still, most economists expect the central bank to extend its bond-purchase program before it ends in March. If so, Mr. Draghi would need to explain how he will continue to find enough bonds to buy, amid concerns about shortages in some markets, particularly German government bonds.
“They need a bit more time to be sure,” said Frederik Ducrozet, an economist at Pictet in Geneva.
Mr. Draghi hasn’t spoken publicly since July. But Benoît Coeuré, who sits alongside Mr. Draghi on the ECB’s six-member executive board, spoke instead at the Federal Reserve’s annual conference at Jackson Hole, Wyoming.
In that speech, Mr. Coeuré warned about the dangers of using unconventional policy tools, such as bond purchases and negative interest rates, for too long.
“Thus far, the benefits of such measures have clearly outweighed their costs, but we cannot rule out a situation where the side effects are such that the negative consequences prevail,” Mr. Coeuré said.
Such concerns are mounting in Germany, where banks are under fresh pressure in the wake of the Brexit vote. The nation’s savings rate has also started to rise, as some savers seek to offset the effect of low rates by socking away more cash for retirement.
Michael Kemmer, general manager of the Association of German Banks, warned on Wednesday that negative rates undermined the interest income of European banks, thereby handicapping them in their main job of providing loans to the economy.
France’s central-bank governor, François Villeroy de Galhau, acknowledged such concerns in a speech to German financiers in Frankfurt on Wednesday.
He urged other policy makers, including governments, to help the ECB in its efforts to stimulate the economy.
“My sense is that [ECB officials are] coming to the conclusion they cannot do it alone, though they’re not at the point of admitting it yet,” Mr. Lueck said.