ECB Shouldn’t Ease to Appease Markets

31 Aug 2015 | Author: | No comments yet »

ECB Shouldn’t Ease to Appease Markets.

A central bank’s work is never done, it seems. BRUSSELS/ FRANKFURT (Reuters) – With low price inflation serving as a reminder of the euro zone’s delicate health, the European Central Bank is having to reassure market investors that it can do yet more to help the economy. The European Union’s statistics agency, Eurostat, said Monday that a large drop in energy prices made up for increases in the costs of food, alcohol and tobacco, services and industrial goods. Policy-setters in Frankfurt, who warn that falling oil has skewed this result, point to a measure the ECB calls core inflation as proof that a one-trillion-euro-plus money printing programme is having an impact.

A prolonged period of low inflation or, worse, an outright drop in consumer prices, is a sign of weak demand and can hurt an economy by encouraging consumers to delay purchases. Inflation growth rates are also set to change later this year as the difference between the price of oil now and in 2014, when it started to fall from June, becomes less stark.

The ECB has vowed to push up weak inflation and stimulate growth through a 1.1 trillion euro ($1.2 trillion) stimulus program dubbed quantitative easing. I don’t see how it can be any different,” said Carsten Brzeski, an economist with ING. “The ECB will prepare markets that it is willing to step up its efforts.” One question, though, is how.

The bank is pushing newly printed euros into the economy by purchasing 60 billion euros a month in government and corporate bonds through September 2016. When asked in a poll by Reuters last week if the ECB had any viable alternatives to its current asset-buying scheme if serious economic weakness were to reappear, the answer was a resounding “No” from 34 of 46 analysts.

ECB President Mario Draghi has said the ECB intends to stick with the program until inflation turns up convincingly, implying the stimulus could be continued beyond September next year. Those who thought there was an alternative listed politically difficult things such as buying equities, and vague things such as more “forward guidance”. For now, the stablisation in inflation in August, which follows a dramatic earlier slump over more than two years, puts the ECB under no immediate pressure to act when its governing council meets this week.

Separately, France’s economy minister said the eurozone’s woes call for a strong eurozone “economic government” with its own budget, and is arguing that preserving Europe’s shared currency will require financial transfers from its strongest countries. In an interview with German daily Sueddeutsche Zeitung, Emmanuel Macron was quoted as saying that a commissioner with far-reaching powers should be put in charge of an “economic government” that would be able to secure financial transfers for countries in crisis or promote reforms. Monetary data released last week showed an impressive 12.1% year on year rise in the so-called M1 aggregate, which measures currency in circulation and overnight deposits and which tends to be a good leading signal for growth.

The idea is to help smooth recessions in the eurozone, where sharing a single currency means countries cannot seek other remedies, such as letting their currency devalue to boost exports. Germany, Europe’s biggest economy, is deeply averse to creating a “transfer union.” But Macron said if eurozone members continue to object to “any form of financial transfer in the currency union, we can forget the euro and the eurozone.” Markets have become excessively dependent on central bankers and are too quick now to call for support; to ride to the rescue when it isn’t clearly necessary would simply embed that unhealthy reliance even more deeply.

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