Reasons to do nothing

April 3, 2014

It’s ECB day and the general belief is that it won’t do anything despite inflation dropping to 0.5 percent in March, chalking up its sixth successive month in the European Central Bank’s “danger zone” below 1 percent.

The reasons? Policymakers expect inflation to rise in April for a variety of reasons, one being that this year’s late Easter has delayed the impact of rising travel and hotel prices at a time when many Europeans take a holiday. Depressed food prices might also start to rise before long.

More fundamentally, they do not see any signs of deflation psychology taking hold, whereby businesses and consumers defer spending plans in the expectation that prices will cheapen.

Expect ECB President Mario Draghi to state a number of times today that inflation expectations are anchored, although quite how one proves that is an open question.

Nonetheless, the tone coming out of the ECB has shifted perceptibly over the past two weeks after Draghi suggested after the ECB’s March meeting that the bank would either do nothing or take bold action should the threat of deflation loom much larger.

In particular, Bundesbank chief Jens Weidmann, normally a hardliner, said printing money was not out of the question although he would prefer negative deposit rates – charging banks to park money at the ECB in the hope they will do something more productive with it — as the means to tackle an overly strong euro.

Has the mood changed within Frankfurt HQ? Certainly the currency seems to be focusing minds as further appreciation would cut import prices and depress inflation further. The best guess is that Draghi, in his monthly news conference, may sound more open to future action than he did last month but the strong consensus of economists in our poll is that it’s too early for anything dramatic today.

Given expectations for inflation to start picking up, it looks like the June meeting may be the decisive moment – by then it will be clearer whether any rise in price pressures in April has carried through into May or was merely a blip. The ECB has set out two scenarios that could prompt fresh action: a deterioration in the medium-term inflation outlook and an “unwarranted” tightening of short-term money markets. The latest data did not prompt either.

Earlier in the day, service sector PMI surveys for euro zone countries and Britain are unlikely to scare the horses. Manufacturing surveys released on Monday showed factory growth cooled last month but with output again rising across the board the bloc’s economic recovery appears more broadly based, albeit shallow.

Russia and the West seem to have reached an uneasy standoff over Ukraine, at least for now. Sanctions are starting to bite but Russian markets have calmed. Russia’s latest service PMI has plunged into contractionary territory, pointing to an imminent recession. But the central bank has just stated that it stopped foreign currency sales on April 1 for the first time in five months.

Yesterday, Finance Minister Anton Siluanov said Moscow would resume market purchases of foreign currency to replenish its Reserve Fund. Whether that is a sign of confidence in the rouble or that reserves are dangerously depleted is not quite clear.

Greece’s privatization agency will detail plans to develop the former Athens Hellenikon airport, the country’s most valuable asset sale since its first EU/IMF bailout in 2010. The agency has picked a group of investors for the development of the prime seaside property. Privatisation has been a key plank of Greece’s bailout programme.

Yesterday twin Reuters interviews with Prime Minister Antonis Samaras and Finance Minister Yannis Stournaras confirmed that they intend to dip their toe back into the bond market soon with a view to the country financing itself unaided by 2016, a fairly remarkable turnaround. Greek officials have previously told Reuters an initial bond issue will likely be for 2 billion euros of five-year paper by June, and it could come even sooner.

Spain will sell up to 5.5 billion euros of five-, 10- and 12-year bonds auction and France will offer up to 7.5 billion euros of long-term paper.

British finance minister George Osborne will testify on his recent annual budget to a committee of parliamentarians after Bank of England Governor Mark Carney said in an interview that interest rates could rise before the next election in May 2015, not a welcome message for the government. The Bank of England will publish its latest survey of banks’ intentions about mortgage, consumer and business lending this morning.

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