Euro-area slowdown: ECB lays groundwork for response

Bloomberg

Some of the European Central Bank’s heavy hitters are laying the groundwork for action. The top economist and the market chief at the Frankfurt-based institution have already signalled they’re discussing options in case the current euro-area slowdown worsens, and the vice president echoed that on Tuesday. There have been similar hints from Francois Villeroy de Galhau, who is the Bank of France Governor and a potential contender to be next ECB president.
The backdrop is a recession in Italy, stagnation in Germany, and a sharply changed outlook for the 19-nation euro area. Investors have also responded, with the euro near its weakest since mid-2017 and the yield on 10-year German bunds threatening to go negative for the first time since 2016.
“It’s clear the ECB is nervous,’’ Steen Jakobson, chief economist at Saxo Bank, said on Bloomberg Television. After saying last year that the “policy of support had worked and Europe had turned a corner, here we are and they are almost in a panic mode in terms of what they need to do.”
While the ECB’s current language — that interest rates won’t rise at least through the summer of 2019 — leaves open the chance of a hike later in the year, the likelihood has very much faded. That’s the message now coming from policy makers, and traders in money markets aren’t pricing the first 10-basis-point hike until June 2020.
Vice President Luis de Guindos did nothing to dispel the market view in an interview with Le Monde released on Tuesday. Policy makers are
currently analyzing the slowdown and have a “large range of tools” to respond, including changing language on the future path of interest rates, he said. Guindos added they won’t decide before a “thorough analysis.”
On Thursday, The ECB will publish the account of its January meeting, when President Mario Draghi said risks to the outlook had moved to the downside — a meaningful shift in ECB language.
That report, which may reveal the extent of policy makers’ concerns, comes a day before Draghi is due to speak in Bologna, Italy.
Beyond that, it’s all eyes on the ECB’s March meeting, when some expect it to announce a new round of long-term loans to banks. Much depends on the next few weeks of data and the new economic forecasts.
Chief Economist Peter Praet could give more insight into the institution’s thinking when he speaks in four different locations this week.
Indicators have continued to weaken since the ECB’s December projections, which saw growth this year of 1.7 percent and inflation at 1.6 percent. By comparison, consensus forecasts for both in Bloomberg’s monthly survey of economists is lower, at 1.4 percent.