ECB: Fears of fragile growth due to the Micron mutation

By Leonidas Stergiou

The ECB meeting in December was set as a milestone for significant changes in monetary policy, especially for the future of the bond market program. Data from the economy, markets and businesses, combined with investor estimates and telephone surveys between Eurozone companies, give conflicting messages. At the end of October, after leading economists analyzed all the data and presented them to the ECB members, it was proposed to limit expectations for major changes in monetary policy at the December meeting. As they explained, the uncertainty that has arisen will probably not help to have a complete and clear picture of all the data. In this context, it is proposed to maintain the bond purchase program until March 2022, without major changes, while raising interest rates is not recommended.

At the end of November, however, another important factor of uncertainty emerged, that of the Omicron mutation. The ECB analyzes both the actual sizes and the expectations of analysts and markets, as it considers that the communication part has an equally significant impact on the effectiveness of monetary policy. Thus, he believes that the regular measurement of market estimates through a questionnaire to professional analysts will include the concerns and possibly the different views of investors and companies, compared to the previous survey in September.

The ECB, in this context, sent a 22-page questionnaire, asking professional analysts to record what they see as valid today, how it should be and when, in what direction and how much specific sizes will change. In simple terms, the ECB wants to see if the market has received the messages it is sending correctly and what the forecasts for the coming months and years are.

Specifically, this comparison is made through 25 questions on the following topics:

– First, ECB interest rates and money market conditions.

– Second, a bond purchase program.

– Third, liquidity.

– Fourth, macroeconomic estimates.

How analysts’ responses are assessed is shown by the analysis presented by the ECB’s chief economists at the previous meeting in October. Indicatively, the following are mentioned from the published minutes.

1. A comparison of 10-year swaps that take into account inflation and ten-year bond yields reveals two contradictory messages. Swaps show that markets are predicting inflation, falling bond yields show the opposite. If other data are analyzed, such as bond spreads and corporate bond movements are added, then it appears that the markets expected an increase in interest rates in 2024, but now there is concern about such a possibility at the end of 2022. But analysts’ answers show Yes, a possible increase in interest rates has come earlier, but it remains for 2024. However, they estimate that inflation will move between 1.8% and 2% in the medium term, while there will be a period of up to 10 years with inflation above 2%. with a probability of 50%.

2. Interest rates and inflation expectations are generally up. Thus, the ECB also sees the positions that investors take in currencies. From these, he understands that the markets do not expect a significant decline of the euro against the dollar.

3. Business growth and expectations remain subdued due to rising energy prices and supply chain problems. The surveys show great variation from industry to industry. Industry and exports of goods have come under the greatest pressure, while services show a better picture.

4. In general, consumption, consumer confidence, and even real estate investments that started very well in 2021, showed “fatigue” in the third quarter.

5. Inflation and supply chain problems are likely to remain longer than expected, eroding growth.

6. Bank interest rates and bond yields are rising, which limits expectations for credit expansion as well.

7. The labor market, despite the containment of unemployment, appears weaker than in 2019.

8. The ECB telephone survey with the largest European companies showed that there will be no salary increases until the end of 2021, while some may be in 2022.

9. The members of the ECB discussed with economists the possibility of stagnant inflation and after analyzing specific indicators and qualitative research, they concluded that this risk is not visible today.

10. The analysis of the data and the questionnaires showed that the new rule defining when and how the ECB’s monetary policy changes is not yet fully clear. That is, the three conditions have not been clarified which are that (a) inflation should be around 2%, (b) the forecasts show that the limit for the three years has been exceeded and (c) that there are indications that this excess will have duration and beyond the period considered by the ECB.

11. Energy prices and supply chain problems have pushed up and other items from the inflation basket. However, these increases are still well below 2% and lower than in other economies.

12. All data (data and qualitative analyzes) continue to show a further rise in inflation by the end of 2021, but a significant decline below 2% in 2022.

13. The ECB should base its decisions only on real data and not on fears, concerns and short-term changes, and should adhere to the new monetary policy rule in order to consolidate the market.