Tuesday, 14 April 2015

Will Mario Draghi Leave the ECB Without Ever Raising Rates?

ECB President Mario Draghi leaves after attending a news conference in Nicosia, 
Cyprus, on March 5, 2015.
Photographer: Yorgos Karahalis/Bloomberg
by Simon Kennedy | 1:12 PM GST | April 14, 2015

Here’s one way of measuring how troubled Europe’s economy is: Investors are betting Mario Draghi will complete his eight-year term as head of the European Central Bank in 2019 without ever raising interest rates.

Money-market derivatives indicate the ECB won’t increase its key rate from 0.05 percent until December 2019 -- two months after Draghi’s tenure is scheduled to end, according to Deutsche Bank AG economist Torsten Slok.

By contrast, Draghi’s predecessor, Jean-Claude Trichet, raised rates 11 times. Even Ben S. Bernanke got to tighten at the Federal Reserve on three occasions.

Swaps now suggest the Fed will lift its benchmark by next March, Slok told clients in a report last week. A year ago, markets indicated the Fed and ECB would be acting in unison by November 2016.

To Slok, the unprecedented divergence between the world’s two biggest central banks means the euro will fall through parity against the dollar and European stocks will continue to draw demand. That outcome may appeal to Draghi as he hopes a cheaper euro and buoyant financial assets will help revive the euro-area economy, vindicating his use of quantitative easing.

Indeed, he is likely to recommit on Wednesday to buying 1.1 trillion euros ($1.16 trillion) of assets by September 2016 after some suggestions that signs of early success mean the purchases will be tapered at some point.

A gap of almost four years between rate hikes from the Fed and ECB would nevertheless be a record setter. When the U.S. last began raising rates in June 2004, the ECB followed 18 months later in December 2005.

Still, not all economists buy the market’s signals.
Increases Seen

At Royal Bank of Scotland Group Plc, Richard Barwell says it’s unlikely the euro region will be in such desperate shape for another four years. “More to the point, I don’t believe that modest hikes in official interest rates will crush the life out of the recovery,” he said

For Holger Schmieding, chief economist at Berenberg Bank, the “best bet remains that the euro zone and the ECB are about two years behind the U.S. and the Fed.”

Erik Nielsen, chief global economist of UniCredit Bank AG, is worried European officials will wait longer than a year or so before tracking the Fed.

“If it is any longer than that, the present European combination of negative policy rates, massive QE and misguided financial regulation could well become truly poisonous, sending many pension funds and insurance companies into insolvency,” he said in a report on Sunday.