Tag Archives: Core Inflation

Inflation Pickup Comes With Bad News for ECB

Bloomberg, Oct 31, 2016

Euro-area inflation accelerated at the fastest pace in more than two years in October. But what looks like progress in stoking consumer prices actually contains some bad news for the European Central Bank.

Policy makers including ECB chief economist Peter Praet have warned repeatedly that they’re lacking convincing signs of underlying price pressures, and inflation data published Monday proved them right. Digging deeper into the figures shows the core rate, which excludes volatile items such as food and energy, fell to the lowest in six months. That’s critical since the central bank views the measure as a guide for where headline inflation will settle.

For Holger Sandte, chief European analyst at Nordea Markets in Copenhagen, soft inflation data and the prospect of core inflation remaining “firmly anchored” below 1 percent seal the case for an extension of quantitative easing beyond its current end-date. “The ECB cannot just sit and watch and let the asset purchases end in March next year,” he wrote in a note to clients.

The ECB next sets policy on Dec. 8, when it will also publish fresh economic forecasts. Policy makers have recently suggested that inflation may reach the goal of just under 2 percent at the end of 2018 or early 2019 — a level it hasn’t touched since early 2013. If that’s to be sustained, the core rate is going to have to improve substantially.



Draghi Nears His QE3 as ECB Seen Relying on Ever-More Stimulus

Bloomberg, Sep 4, 2016


* Economists predict extension of bond buying past March 2017
* Almost half of survey respondents expect ECB action this week

If at first you don’t succeed, extend, and then extend again.

With euro-area inflation stuck near zero for almost two years and Brexit now threatening to undercut the region’s recovery, economists see European Central Bank President Mario Draghi as highly likely to lengthen quantitative easing for a second time. That would take the asset-buying program beyond its current end-date of March 2017 and above the target of 1.7 trillion euros ($1.9 trillion).

More than 80 percent of economists in a Bloomberg survey expect such a decision, with a similar share predicting the ECB will tweak its purchasing rules to avoid running out of securities to buy. Almost half of respondents foresee action on Thursday, when the Governing Council sets policy in Frankfurt, with almost all the rest predicting an announcement at the October or December meetings.

Draghi’s position is reminiscent of the one Ben Bernanke faced in 2012 when the then-chair of the U.S. Federal Reserve added his third installment of asset purchases, so-called QE3, and promised to keep going as long as necessary. The ECB head has repeatedly said officials will keep up their stimulus until they see a sustained adjustment in the path of inflation, and the signs are that’ll take more than another six months.

“Conditions to withdraw monetary stimulus will likely not be met next March,” said Kristian Toedtmann, an economist at DekaBank in Frankfurt. “There is no point in postponing this decision.”

Inflation in the 19-nation euro area was 0.2 percent in August, unchanged from July, and core inflation weakened. Fresh ECB projections are scheduled to be released on Sept. 8., an event that has often underpinned a decision to change policy.

The more the ECB buys, the greater the risk that a scarcity of assets turns into a shortage. To avoid that, economists see it as almost inevitable that a QE extension would have to be accompanied by a change in the central bank’s self-imposed rules on purchases. That’s a potentially tricky debate in the Governing Council, which set the parameters to avoid concerns over market distortion, monetary financing and risk-sharing.

First among those tweaks would be to increase the maximum share of each bond issue that the ECB can buy, according to the survey. Second would be to drop the rule that assets are ineligible if they have a yield below the deposit rate, currently minus 0.4 percent. A minority says the central bank could move away from linking national QE allocations to the size of each economy, referred to as using the “capital key.”

“Removing the deposit-rate floor would be a powerful move and also politically less tricky than deviating from the capital key,” said Holger Sandte, chief European analyst at Nordea Markets in Copenhagen. “The ECB will have to change the QE parameters before long, but they will probably wait until December before taking some of the council members deeper into their discomfort zone.”

The great unknown in the ECB’s policy deliberations is the impact of the U.K.’s decision to leave the European Union. Despite grim predictions, there has so far been little observable negative impact on either the euro-area economy or Britain, its biggest trading partner.

The survey signals little in the way of revisions to the previous round of ECB economic projections, apart from the 2017 figure for gross domestic product growth. That estimate currently stands at 1.7 percent, and 37 of 50 economists said it would be cut.

The ECB’s current inflation forecast doesn’t see price growth returning to target before 2018. That means ending QE — economists expect a Fed-style tapering — is probably a long way off.

“My base case is that they will extend QE by six months in September,” said Claus Vistesen, chief euro-zone economist at Pantheon Macroeconomics Ltd. in Newcastle, England. “Anything else would be a disappointment, and likely cause a hiccup in markets.”


Fed’s Evans Sees Case for Holding Rates Until Inflation Hits 2%

Bloomberg, Jun 3, 2016


* Chicago Fed chief also sees case for two 2016 rate increases
* More than two could cause financial-market turmoil, he says

The Federal Reserve should consider holding off on additional interest-rate increases until inflation rises to the U.S. central bank’s target, said Federal Reserve Bank of Chicago President Charles Evans.

“In order to ensure confidence that the U.S. will get to 2 percent inflation, it may be best to hold off raising interest rates until core inflation is actually at 2 percent,” Evans said in remarks prepared for a speech Friday in London. “The downside inflation risks seem big — losing credibility on the downside would make it all that more difficult to ever reach our inflation target. The upside risks on inflation seem smaller.”

Evans, an influential participant on the rate-setting Federal Open Market Committee who doesn’t vote this year on policy, laid out a couple possible cases that will be debated at the panel’s June 14-15 meeting. He said that while “it may be appropriate” to increase the Fed’s benchmark rate twice this year, “any move toward more aggressive tightening” than that could bring back financial-market turmoil that hit the U.S. economy in the first three months of 2016.

“I still judge that risk-management arguments continue to favor providing more accommodation than usual to deliver an extra boost to aggregate demand,” he said. “Such a boost would provide a buffer against possible future downside shocks that might otherwise drive us back to the effective lower bound.”

The Chicago Fed chief said he doesn’t expect any additional improvement in core inflation, a measure that strips out volatile food and energy prices, in 2016. The Fed’s preferred gauge, based on the prices of personal consumption expenditures, was 1.6 percent in April, up from 1.4 percent at the end of last year.

Evans laid out numerous downside risks to the outlook for prices, including uncertainty over whether the recent pickup in price pressures would last, the possibility that the outlook for overseas economies worsens further, and depressed measures of inflation expectations derived from consumer surveys and bond prices.

Evans’s prescriptions have been embraced by his fellow policy makers in the past. Most notably, the Fed adopted the “Evans rule” in 2012 when it said it would not raise rates before the unemployment rate fell below 6.5 percent. The plan augmented a powerful new tool to influence longer-term interest rates known as forward guidance, a practice that has become widespread among major central banks struggling to revive ailing economies in recent years.

Despite his relatively downbeat message on inflation, Evans conveyed optimism that the U.S. economy would continue to grow at a healthy clip this year and next, between 2 percent and 2.5 percent at an annual rate.

“This pace is modestly stronger than my assessment of the underlying growth trend and should therefore support continued reduction in labor market slack,” he said, while cautioning that risks to his forecast are tilted to the downside and adding that he is “not completely confident that we have met our employment objective just yet.”


Draghi’s First Good News in a Year Has $267 Billion Cost

Bloomberg, May 30, 2016


Mario Draghi may have bought himself a brief respite from the threat of deflation. The cost? More than a quarter of a trillion dollars.

On Thursday, the European Central Bank president should be able to deliver his first snippet of good news for a year on his mandate. Most economists in Bloomberg’s monthly survey predict the central bank’s forecasts for inflation and growth will be left unchanged or increased. Yet respondents see the relief as short-lived, with two thirds predicting more easing will eventually be needed.

The poll results underscore how the Governing Council’s meeting in Vienna, one of the occasional sessions held outside the ECB’s Frankfurt headquarters, is likely to mark a pause for officials after a fresh round of stimulus in March that included a bump of 240 billion euros ($267 billion) to their bond-buying program. While economists are skeptical the package will be enough to return inflation to the target of just under 2 percent, Vice President Vitor Constancio is more optimistic. He said last week that he believes consumer-price growth will be near that goal in two years time.

“The combined economics departments of the Eurosystem central banks must be sighing in relief over this round of forecasts,” said Anatoli Annenkov, an economist at Societe Generale in London. “They have a rare opportunity to forecast higher inflation.”

After ECB staff lowered their euro-area inflation projections in each of their last three quarterly forecasting rounds, just 9 percent of economists surveyed predict a cut for the 2016 and 2018 calculations at this week’s meeting. Eleven percent see a lower 2017 prediction.

More Coming?

The gathering in Austria takes place against a backdrop of growing concern among investors that central banks have run out of ways to bolster feeble prices. Before the meeting, fresh data should give officials more insight into how well the existing stimulus is working.

Eurostat will probably say on Tuesday that the inflation rate rose to minus 0.1 percent in May from minus 0.2 percent the previous month, and unemployment was unchanged at 10.2 percent in April, according to separate Bloomberg surveys. Brent crude, up more than 75 percent since January, is being closely watched for its impact on consumer prices.

The inflation rate in Germany, the region’s largest economy, unexpectedly climbed to zero in May, data showed on Monday. That’s above the median estimate for a reading of minus 0.1 percent in a Bloomberg survey of economists, and compares with minus 0.3 percent in April. A European Commission gauge of euro-area economic confidence rose for a second month to a four-month high.

That could all help lift the ECB’s previous projections, published in March, which foresaw inflation averaging 0.1 percent in 2016, 1.3 percent in 2017 and 1.6 percent in 2018.

Still, achieving the inflation goal any time soon remains a tall order. Core inflation, which the ECB says is a gauge for future price developments, slowed to 0.7 percent in April and is seen barely picking up to 0.8 percent in May. Euro-area negotiated wages rose a nominal 1.4 percent in the first quarter, the slowest pace since the inception of the single currency a decade and a half ago.

“We expect continued slow growth and weak core inflation to see the case for additional loosening build through the course of this year,” said Andrew Wishart, an economist at Capital Economics Ltd. “At April’s meeting, the Governing Council noted their concern over the divergence between still-low inflation expectations and rising oil prices, and a growing perception that monetary policy has reached its limit and can no longer boost growth.”

A key concern for the 25-member Governing Council is whether a failure to hit its inflation target for more than three years is undermining its credibility. Draghi will probably reaffirm the central bank’s commitment to take new measures if necessary, while stopping short of any new pledges for now.

The 67 percent of respondents to the survey who see more easing on the way is up from 61 percent in April’s survey. Just over half of those economists predict a fresh announcement at the Sept. 8 meeting.

The March decision saw quantitative easing increased to 80 billion euros a month from 60 billion euros, starting in April and running through March 2017. A further extension of asset purchases past that end-date is still seen as the most likely form of additional stimulus, though there are growing concerns that some countries will start to run out of eligible bonds. The ECB has said it sees no sign of shortages under current parameters for QE.

Among respondents who expect more easing, 84 percent said the ECB will buy assets for longer, down from 96 percent in April. Forty-two percent said the central bank will further cut its deposit rate, compared with 36 percent in the last survey. Just 16 percent said the central bank will expand QE above its current monthly target of 80 billion euros.

“The ECB is in wait-and-see mode,” said Alan McQuaid, chief economist at Merrion Capital Group Ltd. in Dublin. “Unless headline inflation and inflation expectations pick up over the summer months, then there is every chance we will see the ECB move again.”


Yellen Takes Control of Fed Message to Stress Gradual Approach

Bloomberg, Mar 30, 2016


* Fed chair spells out what officials need to see for rate hikes
* Data dependence places dollar, growth abroad in sharp focus

Federal Reserve Chair Janet Yellen spelled out on Tuesday what she means by data dependence, asserting her leadership of the U.S. central bank with a clear message that interest rates will be raised at a cautious pace.

In one of her most detailed policy discussions this year, Yellen gave investors a list of conditions they need to watch for future rate hikes. Here they are:

  • Foreign economies and their financial markets need to stabilize.
  • The dollar can’t appreciate further. That would depress inflation and exports, and hurt U.S. manufacturing.
  • Commodity prices need to stabilize to help foreign producers find a better footing for growth.
  • The housing sector needs to make a larger contribution to U.S. output.
  • Inflation is a two-sided risk: Yellen is skeptical that the recent rise in core inflation, which strips out food and energy, “will prove durable.” She is watching closely.

Taking Charge

For all their efforts at transparency, Yellen’s speech in New York showed that communication by the Federal Open Market Committee, the panel that sets U.S. interest rates, sometimes means the leadership taking charge to hammer down a guiding view. That can be hard with a group that currently numbers 17 participants. Still, in times of uncertainty, it is the chair’s job to step up and describe the challenges and possible outcomes for policy.

“I thought it was her best performance since she has been chair,” said Michael Gapen, chief U.S. economist at Barclays in New York. “In the absence of unity, the chair has to exert leadership and it felt like she exerted that.”

Officials this month left their target for the federal funds rate unchanged at 0.25 percent to 0.5 percent and signaled a slower pace of rate hikes in 2016 than they’d expected in December, before concerns over Chinese growth sent a spasm through global financial markets.

However, following the March 15-16 FOMC meeting, a number of regional Fed presidents, including James Bullard of St. Louis, Patrick Harker of Philadelphia and Dennis Lockhart of Atlanta, signaled they would like to see rates rise further, pointing to the possibility of a move at the next FOMC meeting on April 26-27.

Rate Path

While the Fed chair steered clear of telegraphing an April or June rate hike, that was probably intentional. Neither she nor anyone else on the FOMC knows if the global climate for growth will have improved enough by then to warrant action.

For that reason, Yellen also drove home the message that when officials don’t know, they either don’t change policy at all, or only move gradually. That means making progress in the current tightening cycle isn’t about the Fed following a pre-set course of rate hikes, but acting when conditions are right. In a way, it takes a page from previous Fed playbooks.

During the chairmanship of Alan Greenspan, Fed officials spoke about “opportunistic disinflation,” or a strategy of moving interest rates early in an economic cycle to clip off the inflation impetus that was embedded in the economy at that time. Today, the Yellen Fed is coming from the opposite direction — letting the economy run hot and only raising interest rates when it won’t upset fragile balances in the global economy and financial markets.

‘Proceed Cautiously’

The Fed chair said it was appropriate to “proceed cautiously.” One sentence later she said “caution is especially warranted.” If her audience at the Economic Club of New York still didn’t get the message, a footnote in the text of her speech stated “uncertainty and greater downside risk” when the Fed’s policy rate is so close to zero “call for greater gradualism.”

“They really mean they are data dependent and willing to be patient,” said Laura Rosner, U.S. economist at BNP Paribas in New York, whose firm predicts no further rate increases for 2016 or 2017. “She is saying, ‘We have started this process and don’t have to continue if not warranted.”’

While the committee continued to suspend its assessment of the balance of risks to the outlook in the March statement, Yellen clearly saw more risks to the downside, said Ward McCarthy, chief financial economist at Jefferies LLC in New York.

“What I learned is just how little weight they gave to their own baseline and how much weight they put on a plethora of downside risks,” he said.

All Embracing

Another insight from the speech, McCarthy said, is the “wide range of things” data dependence covers.

For example, just looking at the Fed’s domestic mandate of employment and inflation, it looks like the central bank should be raising rates further this year.

The unemployment rate of 4.9 percent in February sits just above officials’ estimate of 4.8 percent consistent with full employment — one half of its dual mandate from Congress. The other is price stability. Core inflation measures are rising. Still, the FOMC median estimate for the appropriate pace of rate increases this year was halved in March from four hikes projected in December.

“We are looking at a whole variety of factors that impact the outlook for the U.S. economy,” Yellen said in the question-and-answer session following her speech.

If Fed officials had stuck with their December forecast for four rate rises this year in the face of slowing global growth, it could have been bad news for U.S. inflation and unemployment, she explained.

“Ideally, we want to get ahead of that,” she said. “The market response has been favorable.”