Talking the talk

April 24, 2014

European Central Bank President Mario Draghi delivers a speech in Amsterdam which will fixate the markets following his recent statement that a stronger euro would prompt an easing of monetary policy.

Most notably via his Clint Eastwood-style “whatever it takes” declaration the best part of two years ago, Draghi has proved to be peerless in the art of verbal intervention. But even for him there is a law of diminishing returns which may require words to be backed up with action before long. 

In the 12 days since he put the euro firmly on the ECB’s agenda, the currency has actually weakened a little and certainly shied away from the $1.40 mark which many in the market see as a first red line for the euro zone’s central bank. That is probably because investors expect action from the ECB  soon and if so, there are good reasons to think they may be wide of the mark.

The ECB was open about its surprise at the drop in March inflation to just 0.5 percent but said it still saw no threat of deflation and expects the number to have risen in April (we’ll see next week). That would mitigate against action at the May policy meeting.

New ECB staff forecasts are due in June and by then the picture may be clearer but at best the central bank would be likely to start by shaving already ultra-low interest rates and possibly pushing the deposit rate – already at zero – marginally into negative territory. It is just as likely to do nothing at all, unless its inflation forecast has been downgraded markedly from the 0.6/1.6 percent for 2014 it came up with in March.

The big game changer would be QE – printing money – and even though ECB policymakers, including the Bundesbank chief, say that is a real option despite the profound philosophical difficulties, it is probably nowhere near close.

Draghi said earlier this month that the bank might want to buy corporate assets rather than government bonds but there is neither the structure nor size of market there to make a big difference yet, something the ECB is working on. If it did buy government bonds with new money, most of it would flow to the banks which may not be predisposed to lend it on until their stress tests are out of the way later this year … and maybe not even then.

For now, the market does not seem prepared to test Draghi’s mettle. His number two, Vitor Constancio, speaks in Madrid later in the day.

Turkey’s central bank also has a dilemma after Prime Minister Tayyip Erdogan put it into a corner by demanding immediate interest rate cuts to start reversing the mammoth four percentage point increase enacted earlier this year to defend the tumbling lira. Our polling suggests rates will be left on hold today but that steps may be taken to add liquidity to the market – a way of loosening policy without compromising its independence.

The central bank’s forecast for 4 percent economic growth this year is roughly double the consensus in a Reuters poll of 25 economists last week. Many cite political uncertainty as the big negative. 

Germany’s Ifo will be the big figure of the day after the similar PMI survey on Wednesday showed both manufacturing and services expanded faster in April. No sign yet of a negative impact from the Ukraine crisis which may yet entail tougher sanctions on Russia, which provides Germany with the bulk of its energy.

President Barack Obama – in Tokyo as part of an Asian tour – has said more sanctions were “teed up” against Moscow if it does not deliver on an agreement struck in Geneva last week to ease tensions in Ukraine.

He said Vladimir Putin could avoid such action by changing course but did not hold out much hope, a sound judgment by the look of it  after Russian Foreign Minister Sergei Lavrov accused the United States of being behind the political upheaval in Ukraine and said Moscow would respond if its interests came under attack.

The European Union’s top energy official, Guenther Oettinger, will meet Ukrainian and Slovakian ministers in Bratislava to seek a deal on shipping gas to Ukraine via Slovakia. Slovakia is offering limited supplies via an old unused pipeline, Ukraine is asking for much bigger flows by reversing one tube on one of the main European east-west pipelines.

Russia will not attend the meeting but said it would host talks in Moscow on Monday, bringing together Ukraine Energy Minister Yuri Prodan, Oettinger and Russian Energy Minister Alexander Novak to discuss gas pricing for Kiev.

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