The ECB Is Struggling With Inflation, Interest Rates and The Outlook

by Ferdinando Giugliano via Bloomberg

For the best part of a decade, politicians and investors have looked at the European Central Bank as a guiding light through uncertain economic times. They may need to adapt to a new reality. On three important questions for the future of the euro zone, the ECB just cannot make its mind up.

The first dilemma is the outlook. The central bank can’t decide whether the current “soft patch” is the start of something worse. This matters enormously for the direction of monetary policy. The ECB has already halted its process of “normalization,” choosing instead to extend a new round of cheap loans to the banks and to delay the expected resumption of interest rate hikes. But were the mood to darken significantly, with the euro zone perhaps entering a recession, the thorny question of whether to restart quantitative easing would suddenly reemerge.

In a speech in Frankfurt on Wednesday, ECB president Mario Draghi walked a fine line between gloom and cheer. He acknowledged that the outlook was worse than the central bank had expected at the end of last year, as external demand suffered from global trade tensions. Uncertainty had begun to weigh on investment, he said, especially for companies exposed to foreign markets.

Yet there are still pockets of resilience. Consumers appear much less perturbed, as they benefit from a relatively strong labor market and rising wages. Financial conditions remain favorable, which should ease some of the pressure on investment. Governments are also spending more as fiscal policy has turned mildly expansionary. The mixed picture suggests that the ECB needs to be watchful, but it doesn’t yet make a cast-iron case for more large-scale monetary easing.

The second puzzle for policymakers is inflation. This dilemma faces other central banks too, including the U.S. Federal Reserve. While wages keep rising in the currency union, there’s little sign that this is pushing up inflation in a sustained way. Draghi said this was in part the consequence of the previous long recession, which has made companies reluctant to be the first to lift prices and risk a loss of market share. They may also be cautious because of the uncertain economic outlook. A stronger euro has pushed down the price of imported goods too, making the problem worse.

Nevertheless, none of this is an entirely convincing explanation for stubbornly low inflation. There may be structural factors at play, including the impact of globalization and technological change — something the Fed has been looking at. So long as the mystery remains unsolved, central banks may have little choice but to keep pumping money into the economy to meet their inflation targets.

The last quandary for the ECB is the impact of its policy of negative deposit rates. This means charging banks for the excess reserves they park with the central bank, in the hope that lenders put them to better use in the economy instead. For years, some central bankers, including the Banque de France’s Francois Villeroy de Galhau, have argued that this policy hurts the profitability of lenders at already difficult times. But most of the ECB’s governing council (including its inner core executive board) has remained unpersuaded.

On Wednesday, Draghi hinted that the negative rate idea might need reassessing. “If necessary, we need to reflect on possible measures that can preserve the favorable implications of negative rates for the economy, while mitigating the side effects, if any,” he said. This was pretty noncommittal, but suggests a rethink might be on its way. Could the ECB opt for a tiered system, where the negative deposit rate applies only above a certain exemption threshold? In an interview with Bloomberg News, Peter Praet, the bank’s chief economist, said the governing council would need a clear monetary policy case before doing so. Once again, it’s hard for investors to read which way the ECB is going to jump.

Like other central banks during the crisis, the ECB has adopted a policy of “forward guidance” to give consumers, companies and markets as much information as possible about its next moves. But with the outlook so hazy, and three executive board members, including Draghi, stepping down this year, it can no longer supply all the answers. A new era of unpredictability, and volatility, may be upon us.


April 18, Complimentary Storage In Zurich For 6 Month when you purchase the minimum amount of 10,000 ($€£) in physical gold and or silver for a limited time only

News and Commentary

Fed still ‘patient’ on rates, debating balance sheet policy (Reuters.com)

Gold settles higher, then slips in electronic trade after FOMC minutes (MarketWatch.com)

Moore ‘superbly underqualified’ for Fed, vice chair of joint congressional committee says — support for the gold standard (Reuters.com)

Why 2011 Exposed The World’s True Reserve Currency (ZeroHedge.com)

Will Italy and Venezuela Expose Central Bank Gold Manipulation? (24HGold.com)

Gold Prices (LBMA PM)

09 Apr: USD 1,303.00, GBP 995.13 & EUR 1,155.00 per ounce
08 Apr: USD 1,297.10, GBP 993.58 & EUR 1,154.29 per ounce
05 Apr: USD 1,288.90, GBP 985.11 & EUR 1,147.51 per ounce
04 Apr: USD 1,291.60, GBP 981.87 & EUR 1,149.78 per ounce
03 Apr: USD 1,291.85, GBP 980.38 & EUR 1,148.84 per ounce

Silver Prices (LBMA)

09 Apr: USD 15.25, GBP 11.66 & EUR 13.53 per ounce
08 Apr: USD 15.14, GBP 11.60 & EUR 13.47 per ounce
05 Apr: USD 15.19, GBP 11.63 & EUR 13.53 per ounce
04 Apr: USD 15.08, GBP 11.48 & EUR 13.44 per ounce
03 Apr: USD 15.16, GBP 11.51 & EUR 13.49 per ounce

Recent Market Updates

– Russia Dumps U.S. Dollars and Buys Gold As “Safety Metal”– How A ‘No Deal’ Brexit Could Lead To The “Lehmanization” Of Europe– Silver Bullion Set to Soar to $50 an Ounce (GoldCore Video)

– Perth Mint’s Gold Bullion Sales Surge 68% In March
– Central Banks Continue to Buy Gold at a Record Clip
– ItalExit and Cyber Risks in a Cashless World May Be Bigger Risks Than Brexit : Interview with GoldCore CEO
– Ireland and EU Countries Must Seek ECB Approval to Manage Gold Reserves – Draghi
– Global Risks Increasing – Underlining The Case For Gold in 2019 (GoldCore Video Presentation)
– Brexit and Learning To “Live With Boom and Bust Economic Cycles”

Mark O'Byrne

Also on news-goldcore-com

Videos

When will Silver Break Out? Is Triple Digit Silver Still on the Cards?

Is Gold Still in a Bull Market?

Gold Mining Operation Supply Issues Points to a Sustained Bull Market for Gold

Blog posts

Quantitative Easing: A Boon or Curse?

Central banks’ massive Quantitative Easing (QE) programs have come under scrutiny many times since the central banks fired up the printing press and began quantitative easing programs en masse after the 2008-09 Great Financial Crisis. However, the increase in central bank assets due to quantitative easing programs during the crisis pale in comparison to the […]

READ MORE

The Fed’s Inflation Gamble Continues

The fed’s inflation gamble continues… Are central banks trapped? Last week’s Fed statement and the press conference that followed proved to be the start of a US$90 (4.8%) decline in the gold price. Fed on Economic Recovery The Summary of Economic Projections (known as the dot-plots) released with the statement showed that committee members changed […]

READ MORE

Gold as a Currency- Interactive Gold Charts

Gold has a long history as a currency and as part of the monetary system. The use of gold as a currency dates back to 600 BC in what is present-day Turkey. Coins were first made of electrum – which is an alloy made up of gold and silver, with trace amounts of other metals. […]

READ MORE

Featured

How High is Too High for Rising Government Bond Yields?

READ MORE

Gold, the Tried-and-True Inflation Hedge for What’s Coming!

READ MORE

Silver – 7 Reasons it is Still Set to Soar

READ MORE
Newsletter
Category
Archives
Popular

No posts available

Videos

When will Silver Break Out? Is Triple Digit Silver Still on the Cards?

Is Gold Still in a Bull Market?

Gold Mining Operation Supply Issues Points to a Sustained Bull Market for Gold

Blog posts

Quantitative Easing: A Boon or Curse?

Central banks’ massive Quantitative Easing (QE) programs have come under scrutiny many times since the central banks fired up the printing press and began quantitative easing programs en masse after the 2008-09 Great Financial Crisis. However, the increase in central bank assets due to quantitative easing programs during the crisis pale in comparison to the […]

READ MORE

The Fed’s Inflation Gamble Continues

The fed’s inflation gamble continues… Are central banks trapped? Last week’s Fed statement and the press conference that followed proved to be the start of a US$90 (4.8%) decline in the gold price. Fed on Economic Recovery The Summary of Economic Projections (known as the dot-plots) released with the statement showed that committee members changed […]

READ MORE

Gold as a Currency- Interactive Gold Charts

Gold has a long history as a currency and as part of the monetary system. The use of gold as a currency dates back to 600 BC in what is present-day Turkey. Coins were first made of electrum – which is an alloy made up of gold and silver, with trace amounts of other metals. […]

READ MORE

Featured

How High is Too High for Rising Government Bond Yields?

READ MORE

Gold, the Tried-and-True Inflation Hedge for What’s Coming!

READ MORE

Silver – 7 Reasons it is Still Set to Soar

READ MORE