The European Central Bank is unlikely to contemplate an interest rate cut at Thursday’s policy meeting despite the euro’s sharp rise, but its chief almost certainly faces a grilling afterwards over an Italian banking scandal, Reuters reported on Tuesday.
The euro’s strength will need to show significant harm to the economy before the Governing Council reverses course, and there is next-to-no chance of that happening at its monthly meeting.
Far more likely is that the appreciation will delay discussion of an exit from the ECB’s crisis policy. And a given is that President Mario Draghi will face questioning from reporters over the scandal at Monte dei Paschi.
At Thursday’s news conference Draghi can expect to be asked how much he knew about the derivatives scandal at Monte Paschi, and what he did about it when he headed Italy’s central bank from 2006 to 2011.
ING economist Carsten Brzeski expected Draghi to remain tight lipped. However, he said the scandal would shine a light on the difficulties the ECB faces in building up a euro zone-wide banking supervisory body that is credible but separate from its main business of setting interest rates. “It only stresses that the supervisory role is a hell of a job,” said Brzeski.
Italy’s third largest bank has been at the center of a financial and political storm since it revealed it faced losses of about €720m ($986m) from a series of derivatives and structured finance trades.
Draghi should have an easier ride on monetary policy,
None of the 75 economists surveyed in a Reuters poll last week forecast a cut in rates from their record low of 0.75 per cent on Thursday. The poll suggested the ECB would not change its rates until at least July 2014.
Deutsche Bank economist Gilles Moec, who has just completed a report on the foreign exchange ‘pain threshold’ for euro zone economies, found that France and Italy are already suffering from the euro’s appreciation but that Germany is comfortable.
The currency has risen about three per cent against the dollar since the ECB’s last monetary policy meeting on January 10, when Draghi unwound expectations the ECB would cut rates soon.
“In terms of the pain threshold for the euro zone as a whole, we’re right on it,” Moec said. “So at the euro zone aggregate level, there is no massive pressure that would force the ECB into paying immediate attention to this.”
“You would have to see a clear impact on some data” from the euro’s rise before changing course on rates, said Moec, pointing to export orders and purchasing managers’ indices. “You need a smoking gun, and the smoking gun is not there.”
A batch of indicators cited by Draghi at his January 10 news conference show the economic distortions of the euro zone debt crisis are starting to correct themselves, with the data flow positive over the last month.