Tuesday, 2 February 2016

ECB Tells Governments to Step Up and Markets to Be Rational

In World Economy News 02/02/2016

European Central Bank officials, preparing to consider fresh stimulus for the euro area, warned governments to get moving with structural reforms and told investors to be realistic about any action monetary-policy makers might take.
Speaking at a conference in Budapest, Executive Board member Benoit Coeure reiterated that the ECB will “review and possibly reconsider” its policy stance at its March 10 meeting, while stressing that without economic reforms the region’s recovery won’t last. Governing Council member Ewald Nowotny said he hoped markets would be “more rational” than they were in December, when central-bank measures fell short of expectations and sent the euro and bond yields soaring.
Despite an unprecedented level of monetary stimulus, the ECB is struggling to revive inflation as oil prices slump and China’s slowdown drags on global trade. Factories in the euro area slashed prices of goods by the most in a year in January, a purchasing managers’ survey by Markit Economics showed on Monday, underscoring the risk that weak consumer-price pressures are becoming ingrained.
“We have always made it clear that we are ready and able to play our part,” Coeure said. “But for the recovery to become structural, and thus to increase growth potential and reduce structural unemployment, monetary policy does not suffice.”
Parliamentary Appearance
ECB President Mario Draghi may repeat those concerns when he speaks to the European Parliament in Strasbourg later on Monday. Announcing the review of the central bank’s stimulus on Jan. 21, he also said actions to improve the business environment are “vital.”
While inflation in the 19-nation currency bloc accelerated to 0.4 percent in January, the ECB has warned that the rate may drop below zero again in coming months. Nowotny said new staff economic forecasts to be published on March 10 will be key for any decision on stimulus, and warned investors not to get ahead of themselves.
“In December, they clearly expected too much and I think that should give them a certain lesson,” he said. “Market expectations became much too extensive. So I hope there’s some more rational approach.”
Market View
The ECB cut its deposit rate by 10 basis points to minus 0.3 percent in December and extended its bond-purchase program by six months to March 2017, increasing its size to at least 1.5 trillion euros ($1.6 trillion). Investors were disappointed, selling off the euro and the region’s debt.
Market futures are currently pricing in another 10 basis-point cut to the deposit rate at the next meeting and some economists have suggested that the purchase program will be increased from the current 60 billion euros a month. Nowotny, who heads Austria’s central bank, said it is “much too early to have a discussion” on the deposit rate.
The March projections will include an outlook for 2018 for the first time and Governing Council member Jan Smets told reporters in Budapest that would be a significant factor.
“Officials are talking about a protracted period of low inflation, not deflation,” he said. “We have projections for one year further, so it will be very important to look at this and see what the situation is in terms of our primary mission: anchoring inflation expectations.”
Coeure also urged a renewed political commitment to strengthen the institutional setup of the economic and monetary union. Methods of advancing European integration so far have not been sufficient to foster consensus on the design of economic policies, and the region is ill-equipped to deal with new challenges such as the migrant crisis and terrorism, he said.
“We are at a point where integration cannot and should not continue as a technical and technocratic exercise,” Coeure said. “It is now time for political leaders to take up the baton, because only they will be able to convince their electorates of the need for further deepening.”

Source: Bloomberg