ECB win­dow for stim­u­lus clos­ing as prices slide

The Pak Banker - - COMPANIES/BOSS -

For the next three days, Euro­pean Cen­tral Bank of­fi­cials will walk a com­mu­ni­ca­tions tightrope. With the lat­est in­fla­tion fig­ures show­ing the re­turn of price de­clines, the win­dow of op­por­tu­nity is clos­ing for the ECB to sig­nal any stim­u­lus in­ten­tions for its March 10 de­ci­sion be­fore a self-im­posed quiet pe­riod starts on Thurs­day. Ex­ec­u­tive Board mem­ber Benoit Coeure, the ar­chi­tect of euro-area quan­ti­ta­tive eas­ing, will speak in both Frank­furt and Brus­sels on Wed­nes­day, with hints also pos­si­ble from his col­league Sabine Laut­en­schlaeger and na­tional cen­tral bank heads.

The stakes are high: bonds slumped and the euro surged the most since 2009 when a pol­icy tweak in De­cem­ber fell short of in­vestor ex­pec­ta­tions. To avoid a rep­e­ti­tion of that, of­fi­cials must re­in­force the re­frain that they have the tools to stoke con­sumer prices and the will­ing­ness to use them, with­out prim­ing mar­kets for ac­tion they won't de­liver.

"Gov­ern­ing Coun­cil mem­bers will be more mind­ful than ever about how their com­ments will be in­ter­preted in the run-up to what may be most im­por­tant meet­ing this year," said Timo Del Car­pio, Euro­pean econ­o­mist at RBC Europe Ltd. in Lon­don. At the same time, the ECB is "work­ing hard to dis­suade peo­ple of the no­tion that its hands are tied."

The ECB's fight against per­sis­tently low in­fla­tion us­ing neg­a­tive in­ter­est rates and a 1.5 tril­lion-euro ($1.6 tril­lion) bond­buy­ing plan has made lit­tle vis­i­ble progress. Euro-area con­sumer-price growth has fallen short of the goal of just un­der 2 per­cent since early 2013.

The in­fla­tion rate dropped to mi­nus 0.2 per­cent in the year through Fe­bru­ary from a pos­i­tive read­ing of 0.3 per­cent the pre­vi­ous month, ac­cord­ing to data pub­lished Mon­day. Core in­fla­tion, which strips out volatile food and en­ergy, slowed to 0.7 per­cent from 1 per­cent.

The ECB is "in the or­ange zone, or red zone" when it comes to its in­fla­tion man­date, said Jean-Fran­cois Per­rin, an in­fla­tion strate­gist at Credit Agri­cole CIB in Paris. "It will have to do more."

What "more" it will do won't be for­mally agreed on by the Gov­ern­ing Coun­cil un­til the morn­ing of March 10, shortly be­fore the cen­tral bank an­nounces its in­ter­est-rate de­ci­sion and Pres­i­dent Mario Draghi holds a press con­fer­ence. That casts the spot­light on this week's pub­lic ap­pear­ances.

Laut­en­schlaeger will speak at a riskman­age­ment con­fer­ence in New York. Coeure, who is re­spon­si­ble for the ECB's mar­ket op­er­a­tions, will be at a con­fer­ence in Frank­furt be­fore trav­el­ing to Brus­sels for a hear­ing at the Euro­pean Par­lia­ment on a bud­getary ca­pac­ity for the euro zone.

Klaas Knot, the head of the Dutch cen­tral bank, will also be at the Brus­sels hear­ing. Bank of France's Fran­cois Villeroy de Gal­hau, one of the Gov­ern­ing Coun­cil's new­est mem­bers, will ad­dress the French Na­tional As­sem­bly's fi­nance com­mis­sion on Wed­nes­day. He told Frank­furter All­ge­meine Son­ntagszeitung that de­fla­tion is the main dan­ger fac­ing the euro zone, ac­cord­ing to the tran­script of an in­ter­view pro­vided by his of­fice on Sun­day.

"The ECB haven't re­ally prepped the mar­kets as of yet; they've said they need to re­con­sider the mon­e­tary stance but they haven't given too much away on what that im­plies," said Marchel Alexan­drovich, se­nior Euro­pean econ­o­mist at Jef­feries In­ter­na­tional Ltd. in Lon­don. "Mar­kets ex­pect some­thing to hap­pen, with­out hav­ing a clear idea of what it might be. It's kind of this blind faith that the ECB will de­liver some­thing." Traders had too much faith on Dec. 3, lead­ing to a sell­off when Draghi an­nounced a "re­cal­i­bra­tion" of stim­u­lus that ex­tended the du­ra­tion of QE but didn't in­crease monthly pur­chases be­yond the cur­rent 60 bil­lion euros.

"The risk is a rep­e­ti­tion of a De­cem­ber-type event," said Fabio Bal­boni, an econ­o­mist at HSBC Hold­ings Plc in Lon­don. "There's a num­ber of things that the ECB can do. To me, the key thing is to then square that with the mar­ket ex­pec­ta­tion." This time around, swaps traders fully ex­pect the ECB to cut its de­posit rate by at least 10 ba­sis points from the cur­rent mi­nus 0.3 per­cent, based on mar­ket pric­ing.

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