MarketsEuro back in focus as ECB meets

1 Sep 2015 | Author: | No comments yet »

ECB Shouldn’t Ease to Appease Markets.

Mario Draghi may have skipped the Federal Reserve’s Jackson Hole symposium this year, but he can’t dodge its conclusion: central banks can’t steer inflation as well as they thought. Brussels • Inflation in the 19-nation eurozone was stable in August at an annual rate of 0.2 percent, an official report shows — another weak figure that may help push the European Central Bank toward doing more economic stimulus.German government bonds declined, reversing an earlier gain, as investors saw a greater chance that inflation accelerates in the euro area as crude-oil prices jumped. 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.

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. Oil surged to a one-month high after OPEC said it’s ready to talk to other producers to achieve “fair prices,’’ and the U.S. government reduced its crude-output estimates. “Inflation expectations are at least tentatively recovering” and that “seems to be another driver of this move,” said Michael Leister, a senior rates strategist at Commerzbank AG in Frankfurt. Whether that heightens calls for the ECB to step up its 1.1 trillion-euro ($1.2 trillion) quantitative-easing program will depend on how Draghi communicates the complex economic picture. 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.

People think “central banks don’t have a handle on inflation any more and that’s not true,” Jon Faust, professor of economics at Johns Hopkins University, said in an interview at the Kansas City Fed’s annual meeting in Jackson Hole, Wyoming. “Inflation will come back, but the specific timing of that is much more difficult in the current environment.” Euro-area consumer prices rose an annual 0.2 percent in August, unchanged from July, data from the European Union’s statistics office showed on Monday. 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. 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. 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.

The five-year, five-year forward inflation swap rate rose to 1.68 from 1.66 percent at the end of last week and 1.61 percent on Aug. 24, the lowest on a closing basis since February. The ECB’s Governing Council will convene in Frankfurt from Sept. 2 to set monetary policy, and Draghi will present the quarterly economic forecasts at a press conference the next day. 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. 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. 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.”

They’re forecast to stay below 1 percent this year, and rise to 1.01 percent by March, according to economists’ and analysts’ predictions compiled by Bloomberg. Central bankers will have an opportunity to discuss their predicament again starting Sept. 4, when they and finance ministers from the Group of 20 nations gather for a two-day meeting in Ankara. Spanish 10-year bonds yields increased five basis points to 2.11 percent, before the nation sells securities maturing between 2020 and 2044 on Sept. 3.

At Jackson Hole, academics effectively delivered a beating to central banks’ confidence in their ability to predict and manage their key variable, by pointing out wide gaps in knowledge about how inflation works. Worse still, trying to influence inflation while not understanding it is a “recipe for disaster,” according to MIT Sloan School of Management professor Athanasios Orphanides, himself a former ECB Governing Council member. Bank of England Governor Mark Carney said that while China’s slowdown and stock-market tantrum won’t impact his institution’s policy path, central banks should still show humility. “We have to be clear about when we fail,” he said in a discussion session at the Jackson Lake Lodge, inside the Grand Teton National Park. “It is a painful process, but it can bring some credibility.” ECB Vice President Vitor Constancio also argued that his institution’s policy framework remains relevant, even though it wasn’t able to predict or avert the current period of too-low inflation. 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. For Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis, the risk remains that there may be less room than claimed to ease policy.

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