ECB Is Awake and Asleep at the Same Time
(Bloomberg Opinion) -- The European Central Bank has become the Schroedinger’s cat of global monetary policy. It has managed to be both awake and asleep at the same time.
Three senior policy makers signaled concerns over euro-area growth in recent days. At last, officials are finally alive to the risks that the bloc’s situation has become serious.
Terrible industrial sales and orders numbers from Italy on Tuesday show that its manufacturing recession is worsening, and could well precipitate a credit-rating cut by Fitch Ratings on Friday to BBB-, the lowest investment grade. To be fair, an Italian crisis is never far away. But the bloc’s troubles are widespread. Preliminary euro-area manufacturing purchasing manager surveys published on Thursday could show a contraction for February.
Many of the world's central banks, from Australia, India to even the Federal Reserve, have already caught on. They have either turned dovish or even cut rates on what has become a global manufacturing slowdown. Yet where the pain is most evident, in the euro-area, authorities have been the slowest to react. It is a systemic fault that lies at the heart of trying to form policy for 19 countries at once with conflicting needs.
The ECB’s March 7 meeting will include its quarterly forecasting round, and the current projection for 1.7 percent growth in 2019 looks certain to be downgraded – so at least, according to the procedure officials have laid out for themselves, there will be a framework for a response. The question is, what will the ECB do?
Within the range of recent comments, the most policy-specific came from outgoing Chief Economist Peter Praet, who said Monday that there could be a change in the bank’s forward rate guidance. President Mario Draghi’s most recent statement on this is for rates to stay on hold at least through the summer, which translates as rate hike coming sometime in the fourth quarter. It is almost impossible to see how that can happen.
I have some bad news for Praet – changing rate guidance simply isn't going to make a difference. The market has already figured out that the ECB is not raising its negative 40 basis-point deposit rate this year.
As I wrote last month, most likely a new round of targeted long-term refinancing operations – an all-you-can-eat funding vehicle for banks – will be unveiled. This voluntary flavor of quantitative easing does at least allow those institutions most in need of liquidity to drink at the well. But on its own this would just be tinkering by replenishing existing stimulus – the existing TLTRO program will need to be replaced by June in order to keep liquidity flowing freely.
The ECB looks to have made a serious policy error by ending its bond-buying programs just as the economic cycle turned sharply lower. Sure, policy makers will have to change their tune. But recognizing a new reality is not, in itself, a magic wand – especially when everyone else has got there before you.
It’s fair to ask how long it will be before the bank has to resume QE again. As core inflation refuses to budge from around one percent, forward rate expectations have plummeted. Ten-year German bund yields have slipped to 10 basis points, and they were last this low in 2016, when QE was in full swing. That sends a loud message: Draghi's legacy is in peril, and he needs to do whatever it takes to gain control of the economy and prices before stepping down in October.
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Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.
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