Draghi Drives ECB Toward Stimulus Even With Improved Economy
Bloomberg News
The euro-area's fastest economic growth in three years probably won't be enough to stop Mario Draghi from easing monetary policy.
Even with data this week predicted to show expansion accelerated in the first quarter, the European Central Bank president looks set to push ahead with measures that could range from rate cuts to liquidity injections. Inflation stuck at less than half the ECB's goal points to a revival that is still too slow, according to economists from UniCredit SpA to UBS AG.
'A slightly stronger economy isn't going to change much,' said Marco Valli, chief euro-area economist at UniCredit in Milan, who expects the ECB to cut both the benchmark and the deposit rate in June. 'The ECB is becoming increasingly intolerant of low inflation.'
Draghi is fighting to prevent a prolonged period of subdued price gains from derailing the recovery in the 18-nation currency bloc before it becomes entrenched. His declaration last week that officials are 'comfortable' with taking action in June suggests a new policy response is imminent.
Gross domestic product in the euro area probably climbed 0.4 percent in the three months through March, according to the median of 40 estimates in a Bloomberg News survey. That would be twice as fast as the prior quarter and the highest rate since the beginning of 2011. The region exited its longest-ever recession in the second quarter of last year.
Multiple Releases
The European Union's statistics office in Luxembourg is due to release the GDP data at 11 a.m. on May 15. Germany, France, Italy, Austria and the Netherlands will release growth figures earlier in the day.
Growth in Germany, the region's largest economy, will accelerate to 0.7 percent, and Italy and France will post their second straight quarterly expansions, according to separate Bloomberg surveys.
'The recovery is proceeding, but it's proceeding at a slow pace and it still remains fairly modest,' Draghi said last week in Brussels after the ECB left its benchmark interest rate at a record low of 0.25 percent and its deposit rate at zero. 'There is consensus about being dissatisfied with the projected path of inflation.'
June Projections
The EU's statistics office will release its first estimate for May consumer-price gains on June 3. Inflation was 0.7 percent in April, according to the office's initial estimate. While that's up from 0.5 percent in March, it was below forecast and compares with the ECB's goal of just under 2 percent. The rate has been less than 1 percent since October.
Draghi will present revised macroeconomic forecasts when policy makers meet in Frankfurt in June. The ECB predicted in March that gross domestic product will rise 1.2 percent this year, 1.5 percent in 2015 and 1.8 percent in 2016. Inflation is projected at 1 percent in 2014, accelerating to 1.5 percent in 2016.
Reinhard Cluse, an economist at UBS in London, changed his policy forecast after Draghi's comments in Brussels and now predicts a reduction in interest rates.
'The bottom line' is that data are 'unlikely to keep the ECB from cutting in June,' said Cluse. 'In the case of GDP, even a massive upside surprise would not mean that there would be an immediate pass-through to inflation.'
Biggest Fear
Even with the economy recovering and surveys showing a pickup in countries such as Spain and Ireland, which both exited bailout programs in the past six months, unemployment in the euro area is only gradually declining from a record. That signals the expansion has yet to find its way through to the region's job markets, damping aggregate demand.
Draghi said after April's rate decision that his 'biggest fear' is a protracted stagnation that leads to high unemployment becoming structural.
The jobless rate in the currency bloc was 11.8 percent for a fourth month in March, near the all-time high of 12 percent last year. The uneven recovery is highlighted by unemployment rates that range from 4.9 percent in Austria to 25.3 percent in Spain.
'What we really want is a faster recovery,' said Erik Nielsen, chief global economist at UniCredit in London. 'But when the central bank's conventional toolbox is empty, it needs to go to the unconventional toolbox. However, that holds a bunch of tools which have only been used very recently, if at all, so the full effect remains uncertain.'
To contact the reporter on this story: Stefan Riecher in Frankfurt at sriecher@bloomberg.net
To contact the editors responsible for this story: Craig Stirling at cstirling1@bloomberg.net Paul Gordon, Patrick Henry
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