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Draghi’s Mountain Retreat Contemplates New ECB Horizon
When Mario Draghi secludes himself with Europe’s top minds in central banking this week he won’t be able to escape one question: What’s next?
After all but promising that he’ll ease monetary policy in June, the European Central Bank president must now manage market expectations as banks from Goldman Sachs Group Inc. to Societe Generale SA speculate whether he’ll go further and deploy large-scale asset purchases in coming months. Draghi will today open the first ECB Forum, a gathering of policy makers and academics to be held annually in the mountains northwest of Lisbon.
What Draghi says in three appearances over the next two days could provide clues on how he plans to overcome the stubbornly-low inflation that’s threatening the euro area’s return to economic health. Officials have said they’re working on a package of possible measures for the June 5 policy meeting, including interest-rate cuts and liquidity injections, while holding out the prospect of quantitative easing as a more-powerful option.
“An important part of the package will be the accompanying words,” said Francesco Papadia, a former director general of market operations at the ECB and now chairman of Prime Collateralized Securities in Frankfurt. “If he says that the council has given a first installment of measures and will be ready to do more if needed, especially when it comes to bringing inflationary expectations more quickly toward 2 percent, this could give more weight to the easing package.”
Big Names
Draghi will host a dinner today and give a keynote address at 9 a.m. local time tomorrow at the event in Sintra, Portugal, which the bank is keen to promote as a European answer to the U.S. Federal Reserve’s annual monetary conference in Jackson Hole, Wyoming. He’ll wrap up with closing remarks in the afternoon on May 27.
Big-name thinkers on monetary policy such as Nobel Laureate Paul Krugman and Princeton University’s Markus Brunnermeier will address the getaway at Penha Longa, a resort that traces its origins back to a 14th century monastery. They’ll be joined by policy makers from International Monetary Fund Managing Director Christine Lagarde to Eurogroup President Jeroen Dijsselbloem. ECB Executive Board members Vitor Constancio, Peter Praet and Benoit Coeure will chair panel discussions.
Falling Rates
The ECB may use the occasion to elaborate on what Draghi meant when he told reporters on May 8, after leaving rates on hold, that the Governing Council is “dissatisfied” with the outlook for consumer prices and “comfortable” with action in June. Inflation has been below 1 percent since October, less than half the ECB’s goal, and economies from Italy to the Netherlands contracted in the first quarter.
So far, investors have taken him at his word. The overnight rate that banks expect to charge each other a year from now, as measured by Eonia forward contracts linked to ECB meetings, was at 0.05 percent on May 23. It was at 0.14 percent on May 7, a day before the last rate decision. The euro fell to a three-month low of just above $1.36, after climbing as high as $1.3993 on May 8.
Ninety percent of economists in the Bloomberg Monthly Survey predict the European Central Bank president will ease policy in June. Most forecast a simultaneous cut in the benchmark rate, now at 0.25 percent, and the deposit rate, which is at zero. That would make the ECB the first major central bank to charge for holdings lenders’ excess cash overnight. Denmark ended its experiment with negative rates last month.
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EU vote winds up with anti-EU parties seen making gains
Europeans voted in EU parliamentary elections on Sunday with eurosceptic parties and radicals expected to see gains after years of economic crisis and belt-tightening austerity.
Voters in 21 EU states -- including France, Germany and Italy -- headed to the polls to elect 600 of 751 European parliamentarians, ending a four-day vote that began in Britain and the Netherlands on Thursday.
In Greece, anti-austerity leftist party Syriza held a slight edge over the leading government party while at the other end of the political spectrum in Austria, the far-right Freedom Party surged into third place.
Exit polls put Syriza on between 26 and 30 percent while neo-Nazi party Golden Dawn ranked third with up to 10 percent of the vote.
First estimates showed Germany's anti-EU Alternative for Germany (AfD), founded only last year, winning 6.5 percent, above the 5.0 percent threshold to enter parliament, though Chancellor Angela Merkel's conservatives led the pack.
As in other countries, the anti-immigration party tapped into growing voter frustration with the European Union, saying Brussels has too much power and does not listen enough.
In Denmark, France and Italy, anti-EU parties are poised to take first or second place, shaking up national politics and setting up a battle against Brussels from the inside.
In Britain, the eurosceptic UK Independence Party (UKIP) led by Nigel Farage -- a party without a single seat in the national parliament -- surged Thursday in local council polls held in parallel with the EU vote, rocking the establishment.
Official results will not be announced in all countries until polls close in the last country, Italy, at 2100 GMT.
- Legitimacy problem -
The voting takes place amid anger over belt-tightening measures imposed by Brussels to tame the debt crisis, as well as concern over the chaos unravelling on Europe's eastern borders.
Turnout will be watched to see if it reflects growing popular exasperation with the EU, after it hit a record low 43 percent in 2009.
Early indications suggested slightly higher turnout, notably in France, Germany and Portugal but in Slovakia, the worst performer in 2009, it looked set to be even lower at just 13 percent.
"There is a legitimacy problem," Carnegie Europe director Jan Techau told AFP.
Polls show mainstream groupings, the centre-right conservatives and centre-left socialists, will hold about 60 percent of the seats in the next parliament compared with the current 70 percent.
The latest PollWatch survey forecast victory for the centre-right European People's Party (EPP) with 217 seats in the EU parliament against 201 for the Socialists and Democrats (S&D).
Traditionally they have worked together much of the time and should be able to continue to do so, analysts said.
- Democratic deficit -
Faced by mounting hostility to the Brussels bureaucracy, EU political leaders have worked hard to correct a so-called "democratic deficit".
For the first time, the five main groups in parliament named candidates to be the next head of the powerful European Commission and sent them out on the campaign trail.
They also organised televised debates between the candidates, exposing them to the harsh light of public questioning.
Summing up the hopes of reconnecting with the bloc's 500 million people, a giant banner hung at EU headquarters in Brussels read: "This time it's different -- Your vote counts."
Analysts have their doubts, however.
"The European Parliament's bid to politicise and personalise the vote has not worked," said Jean-Dominique Giuliani of the Robert Schuman Foundation.
Instead, the eurosceptics and more radical groups have picked up support on anti-immigrant and anti-EU issues made doubly sensitive when 26 million people are out of work, including more than half those under 25 in countries such as Greece and Spain.
"It's clear that these elections cannot just go on like this because people simply do not consider the European parliament to have political weight," Techau said.
"There will have to be substantial reforms."
- Russia fears in EEurope -
In Eastern Europe, the Ukraine crisis and fears of a resurgent Russia appear to have bolstered the attraction of EU ties and the security they offer.
In Lithuania, 44-year-old civil servant Jurate Kiserauske said the EU "is our only salvation and future. If we are not there, we would not remain where we are but we would return back to Russia, to the Soviet Union".
Among the early voters in Romania on Sunday, which only joined the EU in 2007, was pensioner Didina Nicolae, 78.
"I went to vote because I want Romania to become a true European country with a higher standard of living," she told AFP.
On Saturday, Czech Republic voters backed three pro-EU parties, while in Latvia, a rightwing anti-EU party -- the National Alliance -- trailed in third.
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EURUSD: Remains Weak And Vulnerable
EURUSD: While outlook for EUR remains to the downside on further decline, it faces the risk of a recovery of its one-week weakness. If this is triggered, expect further upside towards the 1.3700 level where a break will aim at the 1.3774 level.
A break will set the stage for a run at the 1.3839 level. Further out, resistance resides at the 1.3905 level and 1.3900 level. On the other hand, support lies at the 1.3676 level followed by the 1.3600 level. Further down, support stands at the 1.3550 level where a violation will target the 1.3500 level.
All in all, EUR remains biased to the downside in the medium term but faces recovery higher.
German Consumer Confidence To Stay At 7-Year High
German consumer confidence is set to remain unchanged at a 7-year high in June, survey data from market research group GfK showed Monday.
The forward-looking consumer confidence index revealed a reading of 8.5 points for June, unchanged from May. The score matched economists' expectations and was the strongest since January 2007.
The consumer climate is maintaining its very stable development and has now been unchanged for four months, GfK said.
Among three components of the consumer sentiment index, economic expectations and willingness to buy gained upward strength, while income expectations lost a large share of the increase achieved in the previous month.
The economic expectations index climbed 6.4 points to 38.5 in May. A higher value was last recorded in July 2011, when it climbed to 44.6 points.
Despite ongoing political and economic unrest in Ukraine, reports of continued increase in German employment and fall in registered unemployed below three million strengthened optimism on economic development.
Meanwhile, the income expectations measure fell 4.5 points to 47.8 in May. Nonetheless, the indicator remains at a very high level and is still almost 14 points above the corresponding previous year's value.
Germans appear to be taking an exceedingly optimistic view of the developments they can expect in their personal finances. The stable labor market provides greater scope for salary and wage increases. Inflation also looks set to remain moderate in months ahead.
The third component of consumer confidence, willingness to buy gained 0.9 points to 49.5 in May. Consequently, the desire to consume has consolidated its already high level, it said.
In the first quarter, Germany's economic growth rebounded solely driven by domestic demand. The quarterly growth doubled to 0.8 percent from 0.4 percent in the fourth quarter. However, growth is expected to slow in the second quarter.
The European Commission projects the biggest euro area economy to grow 1.8 percent this year and 2 percent in 2015.
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ECB's Draghi Warns of Ultralow Inflation Risk
European Central Bank President Mario Draghi warned Monday there is a risk that expectations for ultralow inflation will gain a grip in the euro zone and spur consumers and businesses to delay purchases--the latest sign that the ECB is prepared to take fresh easing measures when it meets next week.
Mr. Draghi's comments, delivered at an ECB conference in Sintra, Portugal, outside the country's capital, signaled that the central bank is weighing a wide variety of steps from interest-rate cuts to new bank loans or broad-based asset purchases to keep excessively weak inflation from undermining the euro zone's nascent economic recovery.
Given the time it takes for central-bank policies to affect consumer prices, the ECB must be mindful that any action will occur too late, Mr. Draghi said, strengthening the case for an early response.
"What we need to be particularly watchful for at the moment is the potential for a negative spiral to take hold between low inflation, falling inflation expectations and credit, in particular in stressed countries," Mr. Draghi.
"There is a risk that disinflationary expectations take hold" and cause households and companies to delay purchases and investments "in a classic deflationary cycle," Mr. Draghi said. Deflation refers to a persistent drop in consumer prices that threatens spending, profits and debt financing.
Financial markets have been on heightened alert for ECB rate cuts and other stimulus measures since May 8, when Mr. Draghi said officials would be "comfortable" with taking easing steps at their June 5 meeting. ECB policy makers first wanted to see updated inflation and growth forecasts through 2016 that will be available then, Mr. Draghi said at the time. ECB staff economists update their projections every three months.
Since that comment, other ECB officials have touted a similar line, making interest-rate cuts practically a done deal in the view of financial markets. This would likely include a negative rate on bank deposits parked at the ECB, which is currently zero.
Such a step by the ECB would be unprecedented for such a large central bank, and effectively penalize banks for keeping surplus funds at the ECB rather than lend them out to other financial institutions.
The euro has weakened in recent weeks on expectations for fresh ECB stimulus.
Mr. Draghi's comments Monday did nothing to dissuade investors from these expectations. "We are not resigned to allowing inflation to remain too low for too long," he said.
Annual inflation was 0.7% in April, far below the ECB's target of just under 2% over the medium term. It has been under 1% for many months. Much of the weakening of inflation since late 2011 has been because of lower commodity prices, he said. In addition, efforts by stressed euro countries in southern Europe to improve competitiveness by cutting labor and other costs have kept a lid on consumer-price growth.
While low inflation has benefits by boosting disposable income, it also carries risks by raising the cost of financing debts. Consumers and businesses may respond by cutting back on spending, and banks may tighten standards for extending new credit, Mr. Draghi said.
"This is fertile ground for a pernicious negative spiral, which then also affects expectations," Mr. Draghi said.
In additional to using conventional interest-rate tools, options for the ECB include new long-term loans to banks and purchases of asset-backed securities, Mr. Draghi said Monday, as well as broad-based asset purchases if inflation expectations weaken too much.
He highlighted fresh ECB loans to banks and purchases of asset-backed securities as steps that could play a "bridging role" to keep credit flowing while banks repair their balance sheets.
These measures "could help reduce any drag on the recovery coming from temporary credit supply constraints," he said.
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Great assessment. Very useful analysis.
Today EURUSD is having a breath (Memorial Day) before the next fall!!
ECB Alert To Low Inflation Risk, Ready To Take Action, Says Draghi
European Central Bank President Mario Draghi said on Monday that the bank remains alert to the risks to a prolonged period of low inflation and expressed readiness to take action if required.
At an ECB forum in Sintra, Portugal, Draghi said a prolonged period of low inflation would call for a more expansionary stance, which would also include the asset purchase programme.
If a temporary shock turns more persistent, any monetary policy response might arrive too late, he said, suggesting more pre-emptive action from the central bank.
Markets expect expansionary actions from the ECB as hinted by Draghi at the post decision press conference in May. The central bank chief said the bank would decide on further action after seeing the June macroeconomic projections.
"What we need to be particularly watchful for at the moment is the potential for a negative spiral to take hold between between low inflation, falling inflation expectations and credit, in particular in stressed countries," he said today.
There is a risk that disinflationary expectations take hold and that may cause households and firms to defer expenditure in a classic deflationary cycle, Draghi warned.
Banks may respond to this situation with stricter credit standards and worsens debt burden. "This is fertile ground for a pernicious negative spiral, which then also affects expectations," Draghi said.
Term-funding of loans, be it on-balance sheet or off-balance sheet, it could help reduce any drag on the recovery coming from temporary credit supply constraints, the central banker added.
Further, he said, "We are not resigned to allowing inflation to remain too low for too long."
Inflation has remained below the ECB's target of 'below, but close to 2 percent' for the fifteenth consecutive month in April.
IHS Global Insight's Chief European Economist Howard Archer said the ECB seems highly likely to cut its refinancing rate from 0.25 percent to 0.15 percent or 0.10 percent and to take its deposit rate marginally into negative territory.
It is also looks probable that the ECB will take some liquidity measures in June, he added. However, Archer said he is doubtful that the bank will undertake full blown quantitative easing.
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Draghi Says Timing Key as ECB Watches for Negative Spiral
European Central Bank President Mario Draghi signaled policy makers are ready to take action in June should they see low inflation becoming entrenched.
“What we need to be particularly watchful for at the moment is, in my view, the potential for a negative spiral to take hold between between low inflation, falling inflation expectations and credit, in particular in stressed countries,” Draghi said in a speech at an ECB conference in Sintra, Portugal. “The key issue today, however, is timing.”
Draghi indicated that the ECB is focusing on liquidity measures it could deploy to help free up lending to companies and households. Officials have said they’re working on a package of possible measures for their next meeting, including interest-rate cuts and liquidity injections, while holding out the prospect of asset purchases as a more powerful option.
The speech “seems to reinforce the view that the ECB is much more likely than not to deliver a package of stimulative measures at its June 5 policy meeting,” said Howard Archer, an economist at IHS Global Insight in London. “This will likely include taking its deposit rate into negative territory and liquidity measures aimed at boosting bank lending to businesses, especially smaller ones.”
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ECB Alert To Low Inflation Risk, Ready To Take Action, Says Draghi
European Central Bank President Mario Draghi said on Monday that the bank remains alert to the risks to a prolonged period of low inflation and expressed readiness to take action if required.
At an ECB forum in Sintra, Portugal, Draghi said a prolonged period of low inflation would call for a more expansionary stance, which would also include the asset purchase programme.
If a temporary shock turns more persistent, any monetary policy response might arrive too late, he said, suggesting more pre-emptive action from the central bank.
Markets expect expansionary actions from the ECB as hinted by Draghi at the post decision press conference in May. The central bank chief said the bank would decide on further action after seeing the June macroeconomic projections.
"What we need to be particularly watchful for at the moment is the potential for a negative spiral to take hold between between low inflation, falling inflation expectations and credit, in particular in stressed countries," he said today.
There is a risk that disinflationary expectations take hold and that may cause households and firms to defer expenditure in a classic deflationary cycle, Draghi warned.
Banks may respond to this situation with stricter credit standards and worsens debt burden. "This is fertile ground for a pernicious negative spiral, which then also affects expectations," Draghi said.
Term-funding of loans, be it on-balance sheet or off-balance sheet, it could help reduce any drag on the recovery coming from temporary credit supply constraints, the central banker added.
Further, he said, "We are not resigned to allowing inflation to remain too low for too long."
Inflation has remained below the ECB's target of 'below, but close to 2 percent' for the fifteenth consecutive month in April.
IHS Global Insight's Chief European Economist Howard Archer said the ECB seems highly likely to cut its refinancing rate from 0.25 percent to 0.15 percent or 0.10 percent and to take its deposit rate marginally into negative territory.
It is also looks probable that the ECB will take some liquidity measures in June, he added. However, Archer said he is doubtful that the bank will undertake full blown quantitative easing.
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EUR/USD steady, Draghi comments still weigh
The euro was steady against the U.S. dollar on Tuesday, as markets eyed a secodnd day of remarks by European Central Bank President Mario Draghi, while his comments on Monday continued to weigh on the single currency.
EUR/USD hit 1.3643 during late Asian trade, the pair's highest since May 22; the pair subsequently consolidated at 1.3654, inching up 0.06%.
The pair was likely to find support at 1.3585, the low of February 13 and resistance at 1.3723, the high of May 21.
On Monday, ECB President Draghi said the bank saw a risk of a deflationary cycle taking hold in the euro zone.
Draghi said the ECB is ready to act should it see signs of a negative inflation spiral taking hold, and indicated that the bank is weighing a wide range of policy options, including interest rate cuts, and liquidity injections or broad-based asset purchases to help shore up the fragile recovery in the euro area.
"What we need to be particularly watchful for at the moment is the potential for a negative spiral to take hold between low inflation, falling inflation expectations and credit, in particular in stressed countries," Draghi said.
"There is a risk that disinflationary expectations take hold," prompting consumers and businesses to delay spending. "We are not resigned to allowing inflation to remain too low for too long," he added.
The comments were made at the new ECB annual conference in Sintra, Portugal.
The euro was lower against the pound, with EUR/GBP edging down 0.16% to 0.8089.
Later in the day, the U.S. was to produce data on durable goods orders, house price inflation and consumer confidence.
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