ECB under pressure, March move more likely

February 3, 2014

The European Central Bank meets on Thursday with emerging market tumult bang at the top of its agenda.

It’s probably too early to force a policy move this week – particularly since the next set of ECB economic and inflation forecasts are due in March – but it’s an unwelcome development at a time when inflation is already uncomfortably low, dropping further to just 0.7 percent in January.

If the market turbulence persists and a by-product is to drive the euro higher, which is quite possible, the downward pressure on prices could threaten a deflationary spiral which ECB policymakers have so far insisted will not come to pass.
Euro zone and UK PMI surveys for January will give the latest on the state of Europe’s economic recovery this morning. The Markit/HSBC manufacturing PMI for China has fallen to a six-month low.

The ECB will reveal more detail today on how it plans to go about checking that top euro zone banks have the risks on their balance sheets under control, laying out how it will define when a loan has turned bad and what the next steps will be.

Watch out for signs of coordinated international discussions ahead of the G20 finance ministers in Sydney later in February. Indian central bank governor Raghuram Rajan, a former IMF chief economist, has slammed what he said was a breakdown in global monetary coordination.

Some central banks have already been thrown out of kilter. Turkey whacked up its key rate by more than 4 percentage points last week without doing much good for the lira. South Africa tightened with the same lack of success. Neither move would have been considered remotely likely a month ago.

A failed debt auction in Hungary, Romania being forced to intervene to bolster its leu currency and Russia’s central bank declaring it was ready to provide unlimited intervention to support the rouble all showed how contagion can quickly take hold.

Turkey remains the most vulnerable on our patch with Prime Minister Tayyip Erdogan’s aggressive response to a corruption inquiry unnerving investors already struggling with the impact of the Fed’s taper.

Erdogan has promised an “out of the ordinary” economic package without giving any detail and the government has ruled out capital controls. He is determined to maintain growth with elections looming and has railed against what he describes as an “interest rate lobby” of speculators seeking to undermine his country.

Turkey’s PMI and latest inflation data are due shortly. Erdogan is due in Berlin.

Ukraine is an equally extraordinary story. President Viktor Yanukovich is due back at work having gone to ground on “sick leave” and appears increasingly isolated having offered a string of concessions to his political opponents but failed to co-opt them.

Kiev bowed to intense Western pressure on Sunday to let an opposition activist fly abroad for treatment after his abduction, torture and then attempted arrest. Intriguingly, the EU appears not to have given up on luring Ukraine into its fold. It was Yanukovich’s decision to shun that offer and turn back to Russia that sparked this whole crisis.

EU foreign policy chief Catherine Ashton said she was working with the United States on a “Ukrainian Plan” to help support the economy through a period of political transition – an idea that may be designed to help Ukraine cope with any backlash from Moscow, on which it relies for trade and energy.

Moscow is bailing out Ukraine to the tune of $15 billion. President Vladimir Putin said last week Moscow would wait until a new government was formed before fully implementing the bailout deal.

South Africa also bears watching. President Jacob Zuma, SARB Governor Gill Marcus and Finance Minister Pravin Gordhan speak at a Bloomberg Africa Summit on Monday. Ongoing strikes in the platinum sector and the emerging turmoil must be focusing minds with elections approaching.

One of the by-products of the markets’ sell-off has been a push up in yields for the euro zone’s sicklier members, particularly Greece. Athens will post a sizeable primary budget surplus this year and hopes this will unlock the key to further help from its partners in getting its mammoth debts under control.

Der Spiegel reported that Germany’s finance ministry is preparing the ground for a third aid package for Greece before European elections in May. The possibilities outlined include a further debt haircut that would mainly hit public creditors or a “limited additional programme” in which Greece could receive 10-20 billion euros from the European rescue fund.

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