Can the European Central Bank hold its nerve, as the pressure mounts for it to pump more money into a struggling economy?
The ECBs Governing Councils meeting on Thursday, its first since the summer break, comes at a difficult time. The eurozone is bracing for a second wave of the coronavirus pandemic, the euro is getting uncomfortably strong — a danger to exports —and inflation is falling further and further short of the ECBs target.
To complicate matters further, the U.S. Federal Reserve made it tougher for any other central bank to make an impact on the world economy when it effectively loosened its monetary policy less than two weeks ago.
At first glance, that would suggest the pressure on Frankfurt to do something, and fast, is irresistible. Yet most economists expect it to sit on its hands for at least another three months. Why?
For one thing, the slump in price inflation, with a record low annual rate of negative 0.2 percent in August, was not as dramatic as it seemed. Temporary factors, from Germanys cut in value-added tax to accelerated sales of summer clothing collections, made things look worse than reality and will unwind in due course.
The ECBs rough rule of thumb is that a 10 percent appreciation by the euro leads to a 0.1 percent drop in the inflation rate.
For another, the euros strengthening has — at least for now — petered out. Having topped $1.20 for the first time in 27 months last week, it has fallen back to $1.1767 as of late Tuesday in Europe. The dollar has rebounded as a dip on American markets spurred traders to put their money into the “safe haven” of the U.S. currency.
Even if — as many expect — the euro were to resume its upward march, board member Isabel Schnabel signaled in an interview last week that the ECB wouldnt feel compelled to act.
Schnabel told Reuters that what eurozone exporters may lose in price competitiveness when the dollar weakens is compensated by the greater spending power of other countries as their currencies strengthen. She said shes “not worrying too much about exchange rate developments.”
The ECBs rough rule of thumb is that a 10 percent appreciation by the euro leads to a 0.1 percent drop in the inflation rate. But the chain of causation is never simple, and the coronavirus has complicated it further. Augusts inflation report was the first since the pandemic erupted for which Eurostat said it could measure prices accurately.
Still, the latest figures show that the shock of the pandemic, on balance, tends to push prices downward — the opposite direction of the ECBs target, for inflation of a bit less than 2 percent.
Thats likely to be reflected in new forecasts for growth and inflation for the next two years, which the bank will unveil on Thursday.
“A lot of labour market slack and excess capacity has opened up, which will reduce wage growth and underlying price pressures for a considerable time,” ABN Amros Aline Schuiling wrote in an analysis this week. She pointed out that the two previous shocks to the eurozone economy — in 2008 and in 2012 with the worst of the euro crisis — both led to a sharp fall in underlying inflation.
“The early signs are that underlRead More – Source