The ECB Is Speaking With Too Many Voices

(Bloomberg Opinion) -- Mario Draghi has a problem if he wants to respond proactively to Europe’s economic slowdown: There’s push-back from the most important hawks on the European Central Bank’s governing council. The ECB president has never had it easy trying to balance the differing demands of the 19 euro zone countries (represented on the council by their central bank governors), and his remaining seven months offer little respite.

The big risk is that investors become confused about what to expect from the central bank should things fail to improve, especially given the uncertainty about who’s going to replace Draghi. If growth were to weaken further, it would confirm for many that the ending of Quantitative Easing at the end of last year was a policy mistake. But the Germans, for one, might not see it that way. As such, it’s hard for markets to get a clear idea about how the ECB might respond.

The bank’s March 7th meeting is one of its quarterly forecasting rounds, which is usually when policy changes are made. It’s shaping up to be an important one. Merely delaying decisions until later in the year would give the impression that the governing council just isn’t listening, or can’t agree.

Growth and inflation forecasts will probably be lowered, reflecting the recent data that show the euro-area economy slowing sharply. On the plus side, that should be the trigger for a new round of targeted long-term refinancing operations (the super-cheap funding vehicle for banks, known as TLTROs for short). But failure to do that by June would be the same thing as tightening monetary conditions anyway. And if the decision isn’t unanimous – as seems possible – its impact would be blunted anyway. Investors are highly sensitive to this kind of signalling.

As ever, it’s what happens next on interest rates that matters most – or, more accurately, the guidance on when they’ll be raised. The ECB’s deposit rate is minus 0.4 percent, and current policy is that it will remain so until after the end of the summer. However, the money markets aren’t pricing in an increase until mid-2020. Core inflation in the region remains stuck at 1 percent, well below the ECB’s target of close to 2 percent, so expectations of rate rises have fallen steadily as a consequence.

The ECB Is Speaking With Too Many Voices

Recent comments from the central bank governors of France, Germany and Ireland suggest that the governing council is a long way from consensus about how to respond.

Bundesbank chief Jens Weidmann argued last week that there was “no acute need” for the ECB to adjust its rate guidance – indicating that he didn’t want to offer any comfort on delaying a hike this year.

Francois Villeroy De Galhau, the Banque de France head, has made what look on the surface to be even more hawkish noises – at least that’s how many traders have read them. In an interview with the Portuguese weekly Expresso, he said negative rates were possibly hampering the transmission of monetary policy to the real economy because they were weighing on banks’ profits. While he’s right about negative rates sometimes having perverse effects, it would be mightily strange for the ECB to raise them with the economy slowing down. In fairness, the Banque de France governor may just be looking for ways to mitigate their more unwelcome effects.

Meanwhile, Ireland’s bank governor Philip Lane takes an explicitly dovish line: That the best response to the slowdown is to extend the guidance for keeping rates unchanged to a later date. This carries more weight than usual, given that Lane is about to become the ECB’s chief economist.

Such a display of opposing views on the council with the race still open for Draghi’s replacement is hardly reassuring. Europe will miss the president’s skills when he steps down, but also the clarity that such a singular voice brought. If the euro zone doesn’t get on with finding a successor, the consequences may be ugly.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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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