MacroScope

Draghi in London

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European Central Bank President Mario Draghi will deliver an evening keynote speech in London – the scene for his game-changing “whatever it takes” declaration in 2012.

He is unlikely to come up with anything so dramatic this time but is clearly trying to convince that the ECB could yet start printing money if required to avert deflation.

Draghi has taken the ECB a long way in terms of radical policies which some of its members have found hard to swallow. But QE could yet prove to be a bridge too far. Shortly after Draghi held out the prospect last week of printing euros to ward off deflation, Bundesbank chief Jens Weidmann and his German ECB colleague Sabine Lautenschlaeger mounted a rearguard action.

His colleagues Peter Praet and Benoit Coeure speak earlier in the day.

The European Court of Justice will hear three separate actions brought by Britain against the ECB, each of which contains the policy that central counterparties carrying out clearing operations in euros should be located in the euro zone, thus excluding clearing houses based in London.

London is Europe’s biggest financial centre on which the whole UK economy’s prospects depend so in some respects this is a more important fight for Britain than David Cameron’s failed attempt to block Jean-Claude Juncker from getting the European Commission presidency.

ECB: talk but no action

EThe European Central Bank holds its monthly policy meeting and after launching a range of new measures in June it’s a racing certainty that nothing will happen this time. However, ECB President Mario Draghi has plenty of scope to move markets and minds in his news conference.

We are still waiting for details of the ECB’s new long-term lending programme which is supposed to be contingent on banks lending the money on to companies and households. Last time they got a splurge of cheap money, the banks largely invested in government bonds and other financial market assets. With euro zone yields now at record lows, the ECB would not like to see a repeat.

Draghi will certainly be asked to clarify what looked like a new attempt at forward guidance. Last month, the ECB offered up new four-year loans to banks, and extended its offer of unlimited liquidity to the end of 2016.

Deflating euro zone inflation expectations

EThe euro zone is not deflating, it’s just at risk of a too-prolonged period of low inflation, says European Central Bank President Mario Draghi.

Judging by recent evidence, it might be very prolonged, which is bad news for an economy struggling to shift out of low gear.

Inflation held steady at just 0.5 percent in June, well below the ECB’s 2.0 percent ceiling, stuck in what it calls the “danger zone” of below 1.0 percent for nine straight months.

EU’s top two — oh to be a fly on the wall

Who are the two most important people in the EU? It’s hard to argue against Angela Merkel and Mario Draghi and they meet today in Berlin.

It’s supposed to be a private meeting but of course we’ll be digging, particularly for any signs that the German leader is for or against the European Central Bank printing money if it is required to beat back deflation.

The German media responded negatively to last week’s measures, defaulting to the country’s historic fear of inflation stretching all the way back to the 1920s Weimar Republic although there is virtually no inflation in Europe’s largest economy at the moment. Merkel has given Draghi a fair wind in the past to initiate “unorthodox” policy measures.

Obama impatient with EU over Russia

The G7 has said tougher sanctions on Russia could be imposed as soon as today. EU ambassadors  are holding an emergency meeting in Brussels.

The EU will extend travel bans and asset freezes to more people involved in the Ukraine intervention. For now, Washington is treading the same path though maybe more explicitly targeting Vladimir Putin’s “cronies”.

Barack Obama is already looking ahead to a third round of measures and hinted at impatience with Europe, saying there had to be a united front if future sanctions on sectors of the Russian economy were to have real bite.

Talking the talk

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.

To QE or not to QE?

ECB Vice-President Vitor Constancio testifies to the European Parliament prior to attending the IMF Spring meeting in Washington at the back end of the week along with Mario Draghi and other colleagues. Jens Weidmann, Yves Mersch and Ewald Nowotny also speak today.

There has undoubtedly been a change in tone from the ECB, which is now openly talking about printing money if inflation stays too low for too long (no mention of deflation being the required trigger any more). Even Bundesbank chief Weidmann has done so.

Last week, Draghi made it sound as if really serious thought was being given to how to do it. He raised the prospect of buying private sector assets, rather than government bonds as other central banks have. The question is whether he is trying to talk the euro down or whether the central bank is now more alarmed, and therefore deadly serious.

Reasons to do nothing

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.

Is it time for the ECB to do more?

From financial forecasters to the International Monetary Fund, calls for the European Central Bank to do more to support the euro zone recovery are growing louder.

With inflation well below the ECB’s 2 percent target ceiling and continuing to fall, 20 of 53 economists in a Reuters Poll conducted last week said the bank was wrong to leave policy unchanged at recent meetings and should do more when it meets on Thursday.

And the pressure on the ECB to do more has mounted after the preliminary inflation estimate for March was published on Monday. The data showed inflation cooling down further to 0.5 percent, its lowest since November 2009.

A question of energy

After two days in The Hague, Barack Obama moves on to Brussels for an EU/U.S. summit with Ukraine still casting the longest shadow.

Europe’s energy dependence on Russia is likely to top the agenda with the EU pressing for U.S. help in that regard while the standoff with Russia could give new impetus to talks over the world’s largest free trade deal.

Russia provides around one third of the EU’s oil and gas and 40 percent of the gas is shipped through Ukraine. EU leaders dedicated part of a summit to the issue last week and German Chancellor Angela Merkel supported asking Obama to relax restrictions on exports of U.S. gas.