Sunday, 8 January 2017

Mersch Says ECB Policy Shift Premature as Economy Shows Strength

In World Economy News 09/01/2017

Improving euro-area economic numbers and a faster-than-forecast inflation pickup aren’t enough to warrant an immediate shift in the European Central Bank’s policy, according to Executive Board member Yves Mersch.
“It is absolutely premature today to claim victory over a weak economy,” Mersch, considered one of the more hawkish members of the ECB’s Governing Council said in Paris on Friday. “We have good results but it is absolutely premature to say: drop the guard.”
Mersch’s comments come at the end of a week that saw euro-area inflation surge to the fastest in more than three years and both economic confidence and a key gauge of activity hit the strongest in 5 1/2 years. That will be fodder for ECB President Mario Draghi and fellow policy makers as they assess whether the price pickup is part of a long-awaited “sustained adjustment,” or a technical consequence of a surge in oil costs or a weaker currency.
The improving economic data may strengthen the arguments of the central bank’s more hawkish members that less stimulus may be needed after it extended its bond-buying programs last month to the end of 2017. The bank also lowered the amount of monthly purchases, justifying that action because of “firming” economic recovery.
“Right now, the ECB is in a relatively comfortable position,” said Frederik Ducrozet, senior economist at Banque Pictet & Cie SA in Geneva. “It’s been so far, so good, and Mario Draghi will probably strike a more optimistic tone arguing this is partly due to their efforts when it comes to QE and how transmission channels have improved.”
But, according to Ducrozet, the ECB’s focus is on core inflation and wages, which “remain subdued.” While the headline rate accelerated to 1.1 percent, core was at 0.9 percent in December, far below the ECB’s price stability definition of just under 2 percent.
No Revision
“We never react” to monthly inflation data, Mersch said. “Unless there is something that would terribly invalidate our projections, our operational decisions exist. They are not subject to revision.”
The European Commission’s index of executive and consumer sentiment unexpectedly increased to 107.8 in December, the strongest reading since March 2011, from 106.5. Sentiment improved across all sectors, the report showed.
A separate report showed euro-area retail sales fell 0.4 percent in November from the previous month, though they were up 2.3 percent from a year earlier. In Germany, factory orders dropped 2.5 percent after a 5 percent surge in October.
“In industry, we see a good recovery, both in Germany, where several industrial indicators have risen, as well as in the peripheral countries,” said Daniel Hartmann, an economist at Bantleon Bank in Zug, Switzerland. While rising oil prices may weigh on the economy, the global environment is positive, and “we continue to have tail winds from monetary policy.”
The better sentiment numbers — signaling confidence in a continued recovery — is a reassuring sign in a year of potentially tumultuous politics.
France, Germany and the Netherlands will hold general elections in the next 12 months that could see increased support for populist parties, while the U.K. will start negotiating the terms of its exit from the European Union and Donald Trump assumes the presidency in the U.S.
“The new year has several stumbling blocks along the way,” said Marco Wagner, an economist at Commerzbank AG in Frankfurt. Among other things, elections “will keep raising the question of EU unity whenever euro-skeptic parties achieve high results.”

Source: Bloomberg