German Bonds Achieving Quarterly Gain as Inflation Outlook Dims

30 Sep 2015 | Author: | No comments yet »

Draghi Gauge Falling Most Since 2011 Boosts Euro Bond Investors.

European government bonds were just hours away from completing a gain for the quarter, during which a measure of inflation expectations favored by European Central Bank President Mario Draghi slipped by the most since the height of the region’s debt crisis. Inflation in the euro zone turned negative again in September, data on Wednesday showing, raising pressure on the Europe Central Bank to ramp up monetary stimulus.The ECB is spending €60bn (£44bn) on asset purchases, under its programme known as Quantitative Easing (QE), every month for the next year in an attempt to boost prices.

Prices fell by 0.1 per cent on an annual basis, the first time inflation has dipped below zero since March, missing analyst expectations for a zero reading after August’s 0.1 per cent increase. The 0.1 percent annual decline reported by Eurostat, the EU’s statistics office, was widely anticipated following the recent drop in global oil prices. On Wednesday the Bank of Spain said that it expected economic growth there to slow from 1% to 0.8% in the third quarter, and that the recovery in the jobs market had tailed off over the summer. Goldman Sachs said in a note earlier this month that the ECB was likely to continue the program through the end of next year and only end it in mid-2017.

Timo del Carpio, European economist at RBC Capital Markets, said: “The [ECB’s] governing council will look to cement expectations over the continuation of its asset purchase programmes beyond their nominal end-date of September 2016. The gauge, whose shrinkage last year was cited by Draghi as one of the justifications for considering unconventional policy measures, is set for the biggest decline since the three months through September 2011. Long term inflation expectations have fallen to their lowest level since February, before the ECB’s asset purchases started, as China’s economic slowdown, the commodity rout and paltry euro zone lending growth reinforce pessimistic predictions. The impact of energy costs is evident in the fact that, when they are stripped out of the calculations, consumer prices were 1 percent higher in the year to September. Even Finnish central bank chief Erkki Liikanen, normally considered an inflation hawk, has warned that euro zone growth is at risk from the slowdown in emerging markets and that inflation could fall short of already modest expectations.

Though anticipated, the negative headline rate is likely to be a disappointment to policymakers at the ECB who this year launched a 1.1 trillion euro ($1.2 trillion) stimulus program in the hope of getting inflation back toward target. The data signaled that a global economic slowdown and falling commodity prices is countering the effects of the ECB’s 1.1 trillion-euro ($1.2 trillion) asset-purchase program that started in March. Weidmann said that just in Germany, the euro zone’s biggest economy, consumers and businesses will save €25-billion on lower energy costs, worth about 1 per cent of GDP, keeping the recovery on track even if emerging markets continue to drag.

Falling prices sound good in principle and can be, if temporary — many economists think the current period of weak or negative inflation is a boon to economic activity since it’s largely due to weak oil prices. Repeating his view that asset buys should only be used in an emergency, he also warned that abundant cheap credit – a side-effect of ultra loose monetary policy – is keeping unviable companies alive, posing risks to competitiveness. Central bankers have also argued that there are limits to how much monetary policy can achieve and that trying to push up inflation while the global commodity index has dropped by a third in 15 months overburdens monetary policy.

Falling prices over a long period of time can prompt consumers to delay spending in hopes of bargains down the line and make businesses reluctant to invest and innovate. Eurostat said Wednesday that unemployment across the region fell by a modest 1,000 in August to 17.60 million, which left the jobless rate at 11 percent. Bill Adams, senior international economist at PNC Financial Services Group, said the drop in consumer prices won’t be enough to prompt the ECB to take further action just yet. “But if headline inflation remains very low in 2016, as seems increasingly likely, the central bank will see an open door to extending its program beyond the September 2016 minimum to which it has pre-committed,” he said.

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