Tag Archives: Frankfurt

ECB Will Do What It Must to Spur Price Gains

Bloomberg, Nov 20, 2015


* Euro drops as ECB president signals more monetary easing
* Bundesbank’s Weidmann argues oil slump has stimulative effect

European Central Bank President Mario Draghi set the scene for further stimulus in two weeks’ time, saying the institution will do what’s necessary to reach its inflation goal rapidly. The euro fell.

“If we decide that the current trajectory of our policy is not sufficient to achieve that objective, we will do what we must to raise inflation as quickly as possible,” Draghi said in a speech in Frankfurt on Friday. “In making our assessment of the risks to price stability, we will not ignore the fact that inflation has already been low for some time.”

Draghi’s comments underline the ECB’s concern that the inflation rate in the 19-nation euro area, currently 0.1 percent, will slip further from its target of just under 2 percent amid a high degree of economic slack and slumping oil prices. Policy makers are weighing the need for an expansion to the 1.1 trillion-euro ($1.2 trillion) quantitative-easing program that started in March, or measures such as taking the deposit rate further below zero.

The yield on German 2-year bonds slid to a record low of minus 0.389 percent and the euro dropped. The single currency was down 0.4 percent at $1.0689 at 2:47 p.m. Frankfurt time.

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“A further stimulus announcement in December is a virtual certainty,” said Marco Valli, chief euro-area economist at UniCredit SpA in Milan. “‘We will do what we must’ leaves little room for interpretation: if they fail to reach target, they do more.”

The ECB’s Governing Council will meet in Frankfurt on Dec. 3 for its next monetary-policy meeting. While Draghi and Executive Board member Peter Praet, the institution’s chief economist, have indicated more easing is in the cards, some governors have expressed unease.

Estonia’s Ardo Hansson, Slovenia’s Bostjan Jazbec and Germany’s Jens Weidmann have signaled since the last meeting that they see no need to ease policy further just now.

“I see no reason to talk down the economic outlook and paint a gloomy picture,” Weidmann said in a speech at the same event as Draghi. “Crucially, the decline in oil prices is more of an economic stimulus for the euro area than a harbinger of deflation.”

Praet said in an interview this week that taking no action in circumstances of such low inflation risks the ECB’s credibility, and has argued that the fall in oil prices is increasingly a sign of weakening demand.

QE Adjustment

“If we conclude that the balance of risks to our medium-term price stability objective is skewed to the downside, we will act by using all the instruments available within our mandate,” Draghi said. “In particular, we consider the asset-purchase program to be a powerful and flexible instrument, as it can be adjusted in terms of size, composition or duration to achieve a more expansionary policy stance.”

He added that the interest rate on the deposit facility “can empower the transmission” of asset purchases, “not least by increasing the velocity of circulation of bank reserves.”

Draghi said core inflation, which excludes energy and food, is also a signal of too-weak price pressures. The rate was 1.1 percent in October. While that’s the highest reading in more than two years, it’s still barely half the goal for the headline rate.

Core Concern

“Low core inflation is not something we can be relaxed about, as it has in the past been a good forecaster for where inflation will stabilize in the medium-term,” he said. “While core industrial goods will receive support from the depreciation of the euro, an increase in core services inflation –- today close to an all-time minimum –- will depend on rising nominal wage growth. For that to pick up, the economy needs to move back to full capacity as quickly as possible.”

The ECB is currently buying 60 billion euros a month of bonds and intends to do so through at least September 2016. The deposit rate is at a record-low minus 0.2 percent.

There is “little room for doubt that the central bank is not only about to step up its monetary stimulus, but plans to do so decisively,” said Nick Kounis, head of macro research at ABN Amro Bank NV in Amsterdam. “We expect the ECB to step up the pace of QE by 20 billion euros per month, signal that purchases will go on beyond September, and expand the eligible universe of assets to include regional bonds. We also expect a 10 basis-point reduction in the ECB’s deposit rate and guidance that it would be cut further if necessary.”


Draghi Unveils Revamped QE Program as ECB Downgrades Outlook

Bloomberg, Sep 3, 2015

* ECB president says risks to growth remain on the downside
* Says inflation rate may turn negative in the coming months

Mario Draghi unveiled a revamp of quantitative easing and signaled officials might expand stimulus if the rout in financial markets continues to weigh on growth and inflation.

TheEuropean Central Bank president said in Frankfurt on Thursday that the Governing Council raised the share of bonds the ECB can buy to 33 percent of each issue from 25 percent, and that policy makers are ready to make more adjustments to ensure the full implementation of the 1.1 trillion-euro ($1.2 trillion) program. A weaker global outlook prompted an across-the-board reduction of the institution’s growth and consumer-price forecasts through 2017. Theeuro slid to a two-week low.

The reset of the ECB’s stimulus program after a six-month review gives officials more flexibility as they prepare to continue bond purchases until at least September 2016. Weakercommodity prices, slowing trade and volatility in global equities have fueled speculation that more stimulus is on the way.

“The issue limit by itself isn’t particularly significant, but the signal it sends is,” saidJames Nixon, head of forecasting for EMEA at Oxford Economics Ltd. in London. “It’s a clear signal to the market that they’re ready to do more. If the economy weakens further and inflation doesn’t come back as expected they’ll definitely extend the QE.”

Weaker Recovery

Stimulus will continue until the end of September 2016 “or beyond, if necessary,” Draghi told reporters, in a tweak to language that hints more strongly than before at a readiness to prolong purchases.

“The information available indicates a continued, though somewhat weaker, economic recovery and a slower increase in inflation rates compared with earlier expectations,” he said. “Taking into account the most recent developments in oil prices and recent exchange rates, there are downside risks” to the latest inflation forecasts.

The euro dropped 1.1 percent to $1.1101 at 4:18 p.m. London time
and touched $1.1087, its weakest level since Aug. 19. Government bonds rose across the region, with Portugal’s 10-year yield falling 11 basis points, the most in eight weeks.

Euro falls as Draghi speaks
Euro falls as Draghi speaks

While Draghi said it’s premature to pass judgment on whether “sharp fluctuations” in financial and commodity markets will have a lasting impact on inflation, he reiterated that for a sustained recovery in the region and a return of inflation to the ECB’s goal of just under 2 percent, the asset-purchase program must be fully implemented.

‘Dovish Draghi’

To achieve that, the ECB will buy more individual bonds, subject to “a case-by-case verification” that the central bank wouldn’t gain a blocking minority. In that case the issue share limit would remain at 25 percent, Draghi told reporters.

“I wouldn’t see this change in the issue limit as a huge thing but QE beyond September 2016 now looks increasingly likely,” saidHolger Sandte, chief European analyst at Nordea Markets in Copenhagen. “We expected a dovish Draghi, indicating the willingness and readiness of the ECB to act, but he was as dovish as you can be without doing something.”

The ECB cut its outlook for inflation and growth for each year through 2017. Officials see consumer prices almost stagnant this year with an average increase of 0.1 percent. Draghi said inflation rates in the 19-nation region may drop below zero before accelerating to 1.1 percent in 2016 and 1.7 percent the following year.

China Visibility

“We may see negative numbers of inflation in the coming months: is that deflation?,” he said. “The Governing Council tends to think that these are transitory effects mostly due to oil-price effects. However, as I said before, we’ll closely monitor all incoming information and the Governing Council wanted to emphasize in the discussion we had today its willingness to act, its readiness to act and its capacity to act, its ability to act.”

The economy will grow 1.4 percent this year and accelerate to 1.8 percent in 2017, he said.

Policy makers expect to have “much more visibility” about the severity of China’s economic slowdown and any implications for the euro area after a meeting of Group of 20 finance ministers and central bankers in Ankara that starts Friday, according to Draghi.

“There aren’t special limits to the possibilities that the ECB has in gearing up monetary policy,” he said.


German Manufacturing Orders Surge in Sign of Robust Growt

Bloomberg, Aug 6, 2015

Employees assemble the body shell of a Volkswagen Phaeton automobile on the production line at the Volkswagen AG factory in Dresden, Germany.

German factory orders surged in June in a sign of robust growth in Europe’s economic powerhouse.

Orders, adjusted for seasonal swings and inflation, rose 2 percent after sliding a revised 0.3 percent in May, data from the Economy Ministry in Berlin showed on Thursday. The typically volatile number compares with a median estimate of a 0.3 percent increase in a Bloomberg survey. Orders jumped 7.2 percent from a year earlier.

Germany, Europe’s largest economy, is benefiting from the lowest unemployment rates since the country’s reunification and a euro area that is being reinvigorated by European Central Bank stimulus and low oil prices. While the stand-off between Greece and its creditors caused a drag on some segments of the economy, the Bundesbank predicts “quite robust” growth for this year.

“The fundamental upward economic trend in Germany is intact,” said Andreas Rees, chief German economist at UniCredit Bank AG. “But with such a high number one must say, to be fair, that this occurred mainly because of bulk orders in the aviation sector.”

Airbus SAS, one of the world’s largest commercial aircraft manufacturers that assembles most of its single-aisle planes in Hamburg, received 135 aircraft orders in June, up from the 18 orders placed the previous month. China ordered as many as 75 A330 jets worth about $18 billion at list prices, Premier Li Keqiang announced on June 30.

Export Orders

Export orders jumped 4.8 percent in June, driven by an 8.8 percent increase in investment-goods demand from outside the euro area, the ministry said. Domestic factory orders dropped 2 percent. Total orders rose 3 percent in the second quarter from the previous three months.

The euro rose after the report was published and was up 0.1 percent at $1.0916 at 8:35 a.m. Frankfurt time.

“The trend for factory orders is clearly pointing upward,” the ministry said. “German industry should maintain its path of moderate growth in the coming months.”

Measures of optimism among German businesses improved in July as concerns eased over Greece’s crisis, and economists predict growth accelerated to 0.5 percent in the second quarter from 0.3 percent in the previous three months. In a sign that risks remain, a gauge of manufacturing indicated weaker growth as exports fell for the first time in six months.

“If you look at the fundamentals behind the German economy, they are strong,” said Aline Schuiling, senior economist at ABN Amro Bank NV in Amsterdam. “We had a sharp drop in energy prices, that will support the economy, we have a weak euro, and of course we have incredibly low interest rates.”


ECB Keeps Rates on Hold

Bloomberg, Jul 16, 2015

The European Central Bank left interest rates unchanged at record lows, putting the focus on President Mario Draghi’s press conference where he’ll face questions on Greece’s banking crisis.

The 25-member Governing Council kept the main refinancing rate at 0.05 percent at its meeting in Frankfurt on Thursday, as predicted by all 52 economists in a Bloomberg News survey. The deposit rate and the marginal lending rate stayed at minus 0.2 percent and 0.3 percent, respectively.

Attention now turns to the ECB’s response to a planned bailout that could prevent a Greek exit from the currency bloc and allow its shuttered banks to reopen. The less-immediate, yet potentially bigger, issue may be whether more than five months of fractious political negotiations has damaged a single currency Draghi once called irreversible.

“The Grexit talk has broken a taboo; no amount of words will get the genie back into the bottle,” said Alexander Privitera, director at the American Institute for Contemporary German Studies at Johns Hopkins University in Washington. “Negotiating a bailout with the possibility of exit from the monetary union on the table makes the currency union reversible.”

Bond Repayment

Draghi will speak to reporters at 2:30 p.m. in Frankfurt. The Governing Council met earlier Thursday to set the level of Greek Emergency Liquidity Assistance, the funding that is keeping lenders afloat.

After more than four hours of debate stretching into the early hours of Thursday, Greek lawmakers passed new austerity measures that are a precondition of as much as 86 billion euros ($94 billion) in international aid.

The government still needs to repay the ECB on Monday when 3.5 billion euros in bonds, bought under an earlier crisis program, fall due. Euro-area finance ministers on Thursday agreed in principle to a 7 billion-euro bridging loan, according to an official familiar with the decision. The cash could help Greece meet its near-term debt payments.

Greece’s parliamentary approval, more than two weeks after the previous bailout expired and after the country imposed capital controls, can’t change the fact that the country came within a whisker of having to leave the 19-nation currency club.

Grexit Plans

Europe has “a Grexit scenario prepared in detail,” European Commission President Jean-Claude Juncker said on July 7 after Greek voters rejected a bailout proposal in a referendum.

German Finance Minister Wolfgang Schaeuble reaffirmed his view in a radio interview on Thursday that the only way Greece can get a debt reduction is to leave the euro. He cast doubt on the country’s ability to complete negotiations on a third bailout.

Even ECB Executive Board member Benoit Coeure said last month that a Greek exit can’t be ruled out. That’s a significant shift for the ECB from September 2012, when Draghi warned investors not to bet on the breakup of the euro area, and that the central bank would do what it takes to keep the bloc whole.

“We say that the euro is irreversible,” Draghi told reporters in Frankfurt then. “So unfounded fears of reversibility are just what they are — unfounded fears.”

Draghi may use his press conference to reiterate his view that the Greek crisis exposed the weakness of the single currency’s institutional set up, and that Europe needs to make a “quantum leap” in integration.

“Last weekend was pretty unedifying and pretty depressing for people who think Europe should integrate further,” Stephanie Flanders, chief market strategist for Europe at JPMorgan Asset Management, said in London. “In the long term, the way this agreement was reached will have some cost for Europe’s standing with international investors.”


Euro-Area Bank Lending Increases for First Time Since 2012

Bloomberg, Apr 29, 2015

Lending by euro-area banks to companies and households rose for the first time in three years in a sign that record monetary stimulus is finally reaching the economy.

Bank lending increased 0.1 percent in March from a year earlier, the ECB said in a statement on Wednesday. Loans had posted annual declines in every month since May 2012. Lending climbed 0.2 percent from February.

The ECB has used an array of unconventional tools to encourage credit flows to bolster the region’s sluggish economic recovery. The central bank’s quarterly survey published this month showed the measures are spurring lending even as financial institutions feel the pinch of tighter margins.

“With its more aggressive stance, the ECB is finally bringing the euro zone back to at least trend growth,” said Holger Schmieding, chief economist at Berenberg Bank in London. “Money and credit point to a firming business cycle.”

The euro fluctuated after the report and was up 0.2 percent at $1.1003 at 11:13 a.m. Frankfurt time.

ECB President Mario Draghi told reporters after the April 15 policy meeting that risk aversion among banks has faded. Executive Board member Benoit Coeure said in comments published on the ECB website on Tuesday that “there is no reason to worry about the euro area recovering in 2015 and 2016.”

The central bank has bought covered bonds since October and asset-backed securities since November, and expanded purchases to include sovereign debt in March. It intends to spend a total of 1.1 trillion euros ($1.2 trillion) through September 2016. In addition, it handed 97.8 billion euros in targeted loans to banks on March 19 in the third round of a program designed to boost lending.

The ECB says euro-area economic growth will be 1.5 percent this year and climb to 2.1 percent by 2017 — a pace of expansion the region hasn’t seen since 2007 — as long its monetary stimulus is fully implemented. Draghi has warned that governments should use the opportunity to make reforms to turn a cyclical recovery into a structural one.