ECB, Inflation, the Fed, and Employment in France – My Monday column

Inflation figures at 1.1% in February do not trigger expectations of a fast and sharp change in the ECB’s monetary policy, and Mario Draghi and Peter Praet did not indicate that they were in any hurry to implement swift or sudden change in their comments at the end of last week.
The ECB’s monetary strategy is dependent on reaching inflation in line with its medium-term objectives: the 1.1% figure does not point in this direction.
The chart below shows the contribution from each of the three main sectors to the rise in inflation, and we can see that none of them display a marked uptrend. Continue reading

Growth, Inflationary Risk, and Euro Area Reforms – My Monday column

World growth has stopped accelerating and hit a plateau, inflationary risk is now more visible in investors’ behavior, and the ECB is advocating urgent reforms to the euro area’s institutional framework in order to make it more resilient.

After an acceleration in the last quarter of 2017, is world growth hitting a plateau? This is what manufacturing sector Markit surveys seem to suggest. The swift growth seen right throughout 2017 has ground to a halt, and while indices all stand at admittedly impressive levels reflecting swift growth in economic activity, they are no longer rising.

The global index was flat in January at 54.4 vs. 54.5 in December. This figure is very useful as it acts as a leading indicator of world trade trends. The relationship between the two metrics is important and world growth was so extensive and uniform precisely because this correlation worked well again in 2017. In this respect, monetary policy accommodation across the globe was a prerequisite for a recovery in growth, and in 2017 provided sufficient impetus to truly spark it off. Continue reading

The ECB and the Quest for Full Employment

“To reduce the European unemployment rate, the ECB must copy the Fed’s behavior”

Growth in the euro area picked up considerably in 2017 coming out at 2.5% vs. 1.8% in 2016, and hitting its highest point since 2007. The ECB played a lead role in this economic improvement: its policy of keeping interest rates very low by maintaining the main refinancing operations rate at 0% and via its asset purchase program on longer maturity securities was very effective.

These moves helped encourage Europeans to spend now by reducing the incentives to hang onto their wealth and spend it later, and in this respect, ECB President Mario Draghi skilfully steered the situation. The growth we are currently witnessing is driven by private domestic demand i.e. household spending and investment.

Unemployment trends
Yet unemployment remains high in the euro area, standing 1.4 points above end-2007 figures, when it came to 7.3%. This means that growth has not yet fully completed its upward adjustment. Continue reading

ECB, Monetary Policy and Germany – My Monday column

Mario Draghi’s stance is guarded. His latest press conference gave no indication of the change in communication tone that we are set to see from the European Central Bank in January.
The ECB is finally taking on board the strength of the economic cycle and so its communication stance must adapt to this shift. This is rather good news, as the central bank constantly appeared to be acting in reaction to an environment that could swiftly deteriorate, and this shift can bolster our confidence in the strength and length of the economic cycle. The other point noted by the ECB is the move away from an exclusively inflation-based focus and towards a more broad-based communication tone. This implicitly means that the ECB is extending its reach, but really when it comes down to it, this was already the case: the ECB’s intervention has hinged on the economic cycle rather than inflation since the euro was adopted in 1999. The chart below shows the Markit composite index and the difference in the ECB main refinancing rate over 5 months, and reveals that changes in the second indicator are clearly dictated by changes in the economic cycle, rather than in inflation.

The ECB is picking up its old habits from before the 2007 crisis. Continue reading

The ECB top management will dramatically change before the end of 2019

The European Central Bank is heading for a two-year leadership overhaul that peaks with the selection of a successor to President Mario Draghi, and it will be politics as much as ability that determines who get the jobs.
Five of the ECB’s seven top posts will be vacated by the end of 2019, starting with Vice President Vitor Constancio this June. Among the criteria candidates should bear in mind: being a woman is a plus, and appointing a government minister would break with tradition.
Continue reading this article published by Bloomberg here


The ECB keeps its hands on monetary policy

As expected the ECB has maintained the level of its three interest rates and reduced the size of its asset purchase programme (APP).
The refi rate is still at 0%, the deposit facility rate at -0.40% and the marginal lending facility rate at 0.25%. They will remain at this level way after the ECB will have stopped its asset purchase programme.
This latter has been reduced to EUR 30bn per month from January 2018 until September 2018 except if the profile of inflation doesn’t follow the trajectory as expected by the central bank. In that case the programme could be extended in size and/or duration. (that could be the case as the ECB forecast for the inflation rate is just 1.5% in 2019 (the core inflation rate is also expected at 1.5%). This is way below the target at close but below 2%)).
There are no changes in the forward guidance: 1 – the ECB keeps open the possibility to increase the amount purchased or to extend the period on which it purchases assets. 2- The interest rate will increase only way after the end of the asset purchase programme. It means that Draghi will not not necessarily hike interest rates before the end of his mandate in October 2019.
The ECB will reinvest all the proceeds of its portfolio. It will give details on the 12 month profile of these reinvestments when it will be necessary.
The ECB has not discussed the composition of its APP (between sovereign and corporate bonds) and Draghi said that the APP process was flexible enough to manage the technical constraints that can be faced (not enough bonds to buy in Germany). He didn’t go further in the discussion. (The ECB will be able to mix the APP and the reinvestment to manage the constraint)

The ECB is doing like the Fed: it doesn’t want to surprize investors by its decision. No one is surprised by the reduction in the level of the asset purchase programme. The question was on the amount and on the period. But the choice was limited as the ECB gave the open options in the minutes of its last meeting. Moreover speeches from ECB members were transparent on what they could do.
The main surprise is the stability of the forward guidance. Therefore the change in the APP level appears as a technical adjustment and not as a change in the monetary policy stance.
The ECB doesn’t want to tie its hands in the conduct of its monetary policy. It doesn’t want to create the possibility of divergent expectations on investors side. Therefore the forward guidance remains unchanged but this guidance can be changed by the ECB itself without investors pressure. The balance of strength is still on the ECB side and this will not change in coming months. We will still depend on what they want to say, not the reverse.

The ECB decision

The ECB has published an unchanged statement on its monetary policy.
Mario Draghi’s speech was moderate showing that there is no hurry at the ECB in the monetary policy management. No signal on a possible change in the QE framework in the future. The ECB president said that a decision will be taken at the October meeting but said nothing on details of the discussion. Nothing was said on scarcity of bonds in some country and on how capital keys could be respected.
Interest rates are unchanged and will remain low for an extended period. This stability will go beyond the end of the QE. As the ECB forecasts do not show higher inflation in the future and a convergence to the 2% target that will not take place before 2020 we can expect that ECB’s interest rates will remain at the current level (0% for the refi rate) at least until 2019. (see forecasts here)
QE is still at Eur 60bn until at least December 2017. It could be extended after this date if long term inflation expectations do not converge to 2%.