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Page added on March 4, 2016
For The ECB, It’s No Longer About Oil
Inflation in the euro area came in at 0.2 percent in February, piling further pressure on policymakers at the European Central Bank ahead of next week’s monetary policy meeting.
While the largest component of the price fall in the common currency zone remains energy, the ECB is becoming increasingly concerned about second round effects and the prospect of the oil-price collapse pushing the euro area into deflation.
This is a theme taken up by Frederik Ducrozet, senior economist at Pictet Wealth Management in a note sent to clients on Thursday, in which he outlines the two problems the ECB needs to tackle at its March meeting.
Preserving the credit channel
While things have been improving over the past couple of years for bank lending in the euro area, Ducrozet warns that the ECB should “should take the threat of a potential impairment of the credit transmission channel very seriously” in any new policy measures—such as negative interest rates—announces to tackle inflation. If the external environment remains challenging, then the ECB should be wary of doing anything that puts further pressure on the banking sector.
Addressing inflation dynamics
Ducrozet points says that the most worrying trend in the February inflation numbers is not the oil-driven headline decrease, but rather the unexpected fall in core inflation to 0.7 percent. With survey data suggesting deflationary dynamics have intensified and recent PMIs showing euro-area factories cut prices at the fastest pace in almost three years, he warns that while the risks of a deflationary spiral are low, “this is a risk the ECB cannot ignore in the current context.”
Overall, Ducrozet does not expect the worst-case scenario to materialize, but he does expect the ECB to act preemptively. He predicts the central bank will announce a further rate cut of 10 basis points, bringing the deposit rate to minus 0.4 percent and an increase in asset purchases of €20 billion per month to bring the pace to €80 billion per month. Enough to boost inflation, without harming banks’ profitability.
The ECB is set to announce its latest policy measures on Thursday, March 10.
6 Comments on "For The ECB, It’s No Longer About Oil"
Davy on Fri, 4th Mar 2016 6:58 am
The Eurozone will probably fail eventually from the stress of lack of growth and high social expenditures. The poor south is struggling to pay its debt. The richer north struggling to allow wealth to transfer all the while thinking it is their wealth being transferred when in reality they sucked the poor south dry. Immigration is stressing the open border policy. Extremism is bubbling to the surface. This is the European version. The rest of the world has their version. China and the US are likewise unraveling. The ME is unraveled. Africa is the black hole. Brazil is in a depression and represents South America because the rest of that continent has always been a mess. Join the 21st century of collapse.
Alpha9 on Fri, 4th Mar 2016 8:59 am
Too bad they don’t study economics over there.
There’s this guy Keynes that has a solution.
Something about government Infrastructure spending during a recession. When corporations panic and layoff people, the government can replace those jobs with contracts to build and repair infrastructure.
And during a recession government loans are at ultra low rates, in other words, theres no better time to fix things.
twocats on Fri, 4th Mar 2016 10:50 am
slightly off topic (maybe it is still about oil), but we have our first update about how Energy Companies (mostly) fared in February as it pertains to bankruptcies (and the potential global debt deflation contagion it represents):
http://www.zerohedge.com/news/2016-03-03/how-default-cycle-different-record-low-recovery-rates
Well, rock and shallow sand are the winners of the latest deadpool. Loan Defaults: $9.3 billion in Feb, $14.6 for 2016 so far. A blistering pace. Totals for all of last year was just $37.7 bln.
Rut-roh! We got some work to do now!
rockman on Fri, 4th Mar 2016 12:18 pm
Cat – And now for the Rockman’s next astounding prediction: the sun will rise tomorrow!!! LOL.
What the Rockman can’t predict is how many companies are still surviving today because they still have a lot of their oil hedged and are getting much more then $30/bbl. I suspect a number of these new bankruptcies are companies that had their hedges roll off at the end of 2015.
And $37 billion…you ain’t seen nothing yet. And a fair number of “shoulda been bankrupt” companies won’t add to that tally because they’ll be acquired by other companies that take on their assets AND debts.
Truth Has A Liberal Bias on Fri, 4th Mar 2016 2:36 pm
Oil is just shy of $36. Perhaps short could publish his Etp model and remind me again how this price rise breaks the laws of physics or entropy or some bullshit.
Davy on Fri, 4th Mar 2016 2:44 pm
Short squeeze