| Author (Person) | Jones, Tim |
|---|---|
| Series Title | European Voice |
| Series Details | Vol.5, No.4, 28.1.99, p29 |
| Publication Date | 28/01/1999 |
| Content Type | News |
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Date: 28/01/1999 By "SO FAR, so good," said European Central Bank President Wim Duisenberg last week as he assessed the impact of the devaluation of the Brazilian real on euro-zone monetary conditions. As an ECB governing council meeting approaches next Thursday (4 February), Duisenberg is prepared to wait for unequivocal evidence of a major downturn in business confidence and possible deflation before he sanctions a cut in the bank's key refinancing rate. ECB analysts suggest that the Brazilian crisis should have only a limited impact on euroland despite its significant exposure to the country's foreign debt - 45.7% of the total compared with just 21.9% for the US. They believe that unless Brazil triggers a financial contagion across the world and causes another round of devaluations in Asia, the impact of the recent turmoil should be absorbed by the euro-zone economy without too much pain. This is a view shared by Paul Atkinson, the head of economic prospects at the Organisation for Economic Cooperation and Development. "It is hard to see anything in the pipeline from the emerging markets that is as big as anything we absorbed in 1997-98," he said. "Malaysia, Indonesia, Thailand and Korea all caused big trade adjustments and these have been absorbed, and it is fairly clear from the data that these countries were in trouble and retrenching even before we quite realised it from the panic in the financial markets." European central bankers do not want to tempt fate by saying it, but most of them believe that, barring a Chinese crisis, the euro area has seen the worst of the external shocks and should manage economic growth of 2.5% this year. Signs of inflation in the currency zone are few and far between. The last official data published for the 11-nation area showed prices to be up just 0.9% in November 1998 compared with the same month a year earlier. Based on consumer price indices published by four German Länder this week, Deutsche Bank Research in Frankfurt estimates that the annual inflation rate in Germany was just 0.5% in January - well within the 0-2% target range set by the ECB for the whole single currency area. The strong growth of Germany's broad money supply aggregate (M3) in December was a 'blip', according to economists. The M3 measure, which includes banknotes and coins in circulation and easily-accessed desposits and cashable debt instruments, grew at an annual rate of 5.9% in December. This was up from 5.3% in October and November. Commerzbank economists say this is not a sign of impending inflationary pressures but of special factors including a rush to benefit from tax-advantaged loans for building in eastern Germany and a one-off influx of funds via payments made abroad to domestic companies. With all the historical data suggesting no inflationary trends and little impact on growth from the crises in Asia, Russia and Latin America, the ECB is relying heavily on surveys of business confidence for guidance. The most comprehensive of these will be published by the European Commission next week, on the same day as the council meeting, although the central bankers are certain to have a sneak preview. The last survey revealed a sharp downturn in the Commission's industrial confidence indicator, which takes into account manufacturers' production and order book expectations, their export outlook and stocks of goods. Yet, at the same time, consumer confidence is hitting record highs. Stefan Bergheim, an ECB-watcher at Merrill Lynch in Frankfurt, has an explanation for economic operators' split personality. "This kind of divergence can only be temporary, but what we are seeing is a reflection of pricing power," he said. "Businesses are finding it hard to raise their prices in the current climate, which hurts them, but consumers like it since it boosts their spending power." If, however, the pain and pessimism of manufacturers start to feed through to shoppers, then the ECB may well change its view. Speaking to the European Parliament's monetary subcommittee last week, Duisenberg was typically non-committal on this point, although he was prepared to consider a hypothetical deflationary scenario. "Taking the academic point of view, if there were to be a further sustained deceleration of prices, then a relaxation of monetary policy would be called for and we would take decisions accordingly without any doubt," he said. However, he warned repeatedly - and said the same to the Euro-11 ministerial coordinating group earlier that day - that a further easing of monetary policy would require tight control of public spending. "The ECB is arguing that if it gets the tightening of fiscal policy it wants, then, to keep monetary conditions as they are, monetary policy would be eased," said Jean-François Mercier, an analyst at investment bank Salomon Smith Barney in London. Atkinson suspects the ECB could act earlier, but sees the catalyst not in Brazil or Asia but in the US. Its trade deficit is widening significantly and demand for goods and services is increasingly supported by consumer spending which is, in turn, galvanised by soaring stock market values. "Above-trend growth in the US cannot go on forever," said Atkinson. "If there is a slowdown in the US and monetary easing is the response, there could be a weakening of the dollar and this would quickly become a signal leading the ECB to reassess the situation and conclude that softer monetary policy conditions would be appropriate in Europe." For now, analysts expect the governing council to sit out the start of the annual round of wage negotiations in Germany and the publication of euro-zone governments' budgetary 'stability programmes' before taking any precipitate decisions. "We see no need to change our view that the cut in rates during the first quarter will come in late February or early March," said Manuela Preuschl, ECB-watcher at Deutsche Bank in Frankfurt. Main refinancing rate: 3.00% (confirmed 21 January) Deposit rate: 2.0% (from 22 January) Marginal lending rate: 4.5% (from 22 January) ECB WATCH Key dates in the bank's calendar (29 January - 11 February) 29 January
1 February
2 February
4 February
5 February
8 February
9 February
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| Subject Categories | Economic and Financial Affairs |
