European Central Bank head to sift mixed signs on economy
Updated 2:21 am, Thursday, April 26, 2018
FRANKFURT, Germany (AP) — Investors are waiting to hear what the European Central Bank's president, Mario Draghi, makes of recent conflicting data about the region's economy, and whether the bank will extend its extraordinary monetary stimulus efforts beyond September.
Draghi holds a news conference Thursday after a meeting of the bank's 25-member rate-setting committee at the bank's skyscraper headquarters in Frankfurt, Germany. No changes are expected in interest rates or stimulus settings.
Attention will focus instead on Draghi's assessment of recently weaker indicators such as industrial production as well as any potential impact from tensions over the U.S. move to put tariffs on some imports.
Analysts say Draghi will likely be reluctant to give any hints about when the bank will end its stimulus program, under which it buys 30 billion euros ($37 billion) of bonds per month at least through September.
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Unemployment in the Eurozone hit its lowest rate for almost nine years last November, the latest sign of the revival of the single currency area’s economy. Eurostat, the EU's official statistics agency said that the jobless rate fell to 8.7 per cent, hitting analyst predictions and down from 8.8 per cent in October. The figures are the lowest since January 2009, when the eurozone was reeling from a deep recession following the global financial crisis. The agency said the number of unemployed fell by 107,000 during the month, taking the total down to 14.26 million. Unemployment across the region has been falling steadily over the past year. Figures later this month are expected to show that economic growth picked up in the fourth quarter, possibly to 0.8 percent. The positive data come after the European Central Bank (ECB) announced it was starting to wind down the massive support it has given the 19-member currency zone to help it through the crises of recent years, in view of the solid economy. The ECB remains concerned about the muted levels of inflation in the eurozone despite the positive jobs picture, which should typically boost prices with Europeans more ready to spend. Eurozone inflation is still stubbornly low - slowing to 1.4 in December compared with the ECB's target of two per cent - which has forced bank chief Mario Draghi to reassure investors the era of cheap money was not completely over. Whilst unemployment across the region has been falling steadily over the past year, substantial differences remain. The biggest drops were seen in Greece and Portugal, two of the biggest victims of the eurozone debt crisis. Rates still remained high in Greece and Spain; still, even there, there are signs of improvement. Spain's jobless rate, which in recent years stood at around 25 percent, is now down to 16.7 percent, while Greece's has been steadily falling, though still high just above 20 percent. The lowest unemployment rates were recorded in the Czech Republic at 2.5%, and Malta and Germany, where the rate was 3.6% for both.
Media: EuronewsThe betting is that the bank will put off such clues until its meetings of June 14 or July 26.
The bank uses the bond purchases to push up inflation toward its goal of just under 2 percent, the annual rate considered best for the economy. Right now it is 1.3 percent. The purchases pump newly created money into the economy, which should drive down longer-term interest rates and stimulate growth by lowering borrowing costs for businesses. Ultimately, that should boost inflation.
The timing of the stimulus end is important because it gives a major clue about when the ECB might start raising its interest rate benchmarks. The bank has said rates will only rise well after the end of the purchases. That has led observers to push forecasts for the first rate increase out to the middle or later part of 2019. The ECB's key rates are currently at zero for its own lending to banks and minus 0.4 percent on deposits it takes from commercial banks. The negative rate is a penalty aimed at pushing banks to lend the money rather than deposit it at the ECB.
The ECB has been slow to join the U.S. Federal Reserve in raising interest rates after years of keeping it key rate at zero and engaging in money-printing stimulus following the global financial crisis of 2008-9 and the subsequent Great Recession. The Fed's benchmark federal funds rate is at 1.5 percent.
Europe's economy was slower to bounce back, hampered by a crisis over government and bank debt that burdened several countries that are members of the eurozone from 2010 to as recently as 2015. It has turned in strong growth of 2.5 percent last year, the best in a decade, but inflation has been slow to follow.
One consequence of the different interest rate policies on both sides of the Atlantic is a yawning interest rate gap between U.S. and German bonds. The 10-year U.S. Treasury — once of the world's most widely held investments — yields an annual 3.02 percent, while the equivalent German bond yields only 0.02 percent.
The ECB has credited its policies for bringing down unemployment from over 12 percent in 2013 to 8.5 percent in February and for creating several million new jobs. The zero-rate policy has also meant scant returns for savers and raised concerns that money is being invested in companies that would not survive if they had to pay more normal rates for credit.