The era of easy money is hurtling towards an early end

A spat is developing at the European Central Bank about how — and how soon — the institution should signal its intention to scale back its monetary stimulus program. Data buried in the central bank’s most recent survey of companies suggests a rebound in inflation may inflame the debate sooner rather than later.
Peter Praet, the bank’s chief economist, said earlier this month that “after so many years of accommodation, you cannot change the stance very abruptly.” His colleague Benoit Coeure, who runs market operations, warned of “larger market adjustments” if signaling a change of stance is delayed
too long.
Thus far, Praet can count on a lack of inflationary pressures in the euro zone to justify his wait-and-see stance. Consumer prices have accelerated, but only to 1.9 percent in April, still below the ECB’s 2 percent target. Economists are forecasting a rate no nigher than 1.6 percent in the coming quarters. Stirring beneath the surface, though, there’s evidence that price pressures are starting
to rise.
On Wednesday, the ECB published its biannual survey on “Access to Finance of Enterprises in the Euro Area.” It quizzed more than 11,700 small- and medium-sized enterprises between October and March, of which more than 90 percent had fewer than 250 employees. At the grassroots of the euro zone economy, price pressures are starting to bite.
While 19 percent of respondents said turnover is increasing, they reported no change in profit for the second consecutive survey. The ECB blames inflation for crimping profitability: It appears that weak demand as reflected by the difficulty of finding customers prevents SMEs, in particular, to pass on higher costs to customers such that profitability does not keep pace with the rise in turnover.
That’s unlikely to be sustainable. Bigger companies in Europe are on track for their strongest earnings in more than a decade, according to Morgan Stanley. At some point, not only will those higher costs translate into higher selling prices, but the increase in labor costs will also start to show up in the inflation measures that the central bank cares about.
The key argument for maintaining the pace of the quantitative easing program and keeping official interest rates at their current negative level is to encourage banks to fund investment by lending to companies.
As far as SMEs are concerned, though, access to finance is the least of their worries — and has been since at least September 2014.
While there’s a genuine gap between strong so-called soft economic data (mostly from surveys) and not-so-robust hard data (actual economic outcomes), as far as lending is concerned, the hard data show a revival to levels not seen for almost six years.
ECB President Mario Draghi recently reaffirmed his commitment that his institution will halt its asset purchase program before it raises borrowing costs. The bond-buying is set to finish by the end of the year; if the inflation companies are seeing starts to feed into the official consumer price data in the second half of this year, an increase in interest rates could come more quickly than investors are
currently anticipating.

— Bloomberg

Mark Gilbert is a Bloomberg Gadfly columnist covering asset management. He previously was a Bloomberg View columnist, and prior to that the London bureau chief for Bloomberg News