By Johanna Treeck
FRANKFURT (MNI) – European Central Bank Governing Council members
said the Japanese earthquake and nuclear disaster will play into the
ECB’s monetary policy considerations, but chances are they will not
alter the bank’s plans to raise interest rates in April.
Christian Noyer told German daily Handeslbatt that the ECB will “as
always take all information into account and [Japan] will be part of our
global assessment.”
Asked whether anything had changed since March 3, when President
Jean-Claude Trichet signaled a rate hike for April, Erkki Liikanen said
that ECB Council members “now also follow Japan, so it’s too early to
say on that.”
Policymakers are clearly concerned about the situation in Japan and
its potential impact on the global economy.
France’s Finance Minister Christine Lagarde said Wednesday that she
had convened a teleconference among G7 finance ministers and central
bankers to assess the economic impact of the crisis and see “how we can
react on a financial level.” She asserted that “we need to be at the
disposal of our Japanese friends on monetary matters.”
Interest rate hike expectations in Europe, reflected in the futures
market, have dropped amid high volatility in global stock and commodity
markets. But will the fallout from the Japanese disaster and possible
pressure from non-European policymakers be sufficient to change the
ECB’s plans for April?
Seeking an answer to that question may be somewhat premature, since
so much will depend on how the situation at Japan’s crippled Fukushima
nuclear plant unfolds and how markets react in the run-up to the next
ECB monetary policy meeting in two weeks. Still, in the absence of
additional shocks, the likely answer still appears to be no.
“Fundamentally the situation is the same” as in early March,
Liikanen said. “There are upside risks to inflation, mainly due to the
increase in commodity prices.” He appeared to suggest that the ECB may
need more evidence that raising interest rates would have an adverse
impact before reconsidering its decision to do so. Developments in Japan
will be relevant for “the next meeting,” he said, but “maybe more so the
meetings after.”
Noyer noted that inflation concerns would justify a rate hike,
since rising oil and other commodity prices could cause inflation
expectations to become unanchored. “We want to show that we take it
seriously,” he said.
Most economists expect the global economic impact of Japan’s
earthquake and tsunami to be relatively benign. Japan’s Economics
Minister Kaoru Yosano told the Financial Times Wednesday that “in the
worst case” the negative impact from those two natural phenomena would
not exceed a 0.2% GDP loss. However, the impact from the unfolding
nuclear disaster is harder to gauge.
While oil and commodity prices have dropped since the earthquake,
they are still well above year-earlier levels. Japan was not a key
driver behind the global recovery or commodity prices, which have mainly
risen due to strong growth in emerging economies.
As reconstruction for affected areas in Japan gets underway, the
extra demand for oil could well push up prices again later in the year,
especially if the country’s access to nuclear energy is significantly
reduced. “Japan has large monetary reserves and will probably have to
secure oil soon to meet energy demand. That could put the oil price
under pressure,” ECB Council member Ewald Nowotny warned Thursday.
Longer term, a reassessment of nuclear power use in other countries —
including Germany and China — could add to upward pressure on oil.
While overshadowed by developments in Japan, rising tensions in the
Middle East, where Saudi Arabia has sent troops to help Bahrain
authorities put down protests, could add to oil price pressures.
With the ECB’s medium-term inflation forecast at 1.7%, well in line
with its price stability target, any tightening move would be
pre-emptive, driven by concerns that more sustained global inflation
will eventually lead to domestic second round effects.
It is of course hard to forecast oil and other commodity prices,
but there may be enough reason for the ECB to suspect that the recent
price slump is of a temporary nature and can thus be disregarded when
deciding on policies aimed at the medium term.
On a separate note, many analysts suspect that the ECB raised the
prospect of tightening partially to put pressure on Eurozone governments
to produce effective governance reform and a reinforced crisis fighting
mechanism. Agreements reached over the past few days will give the ECB
little reason take that pressure off.
Leaders did decide to step up the effective lending capacity of the
EFSF bailout fund to E440 billion from the current E250 billion and said
it would be able to buy governments bonds in the primary market.
Secondary market purchases, however, have been excluded, dashing the
ECB’s hope of ending its controversial sovereign debt buying in the near
future.
While finance ministers described their decisions on governance
reform as “historic,” ECB President Jean-Claude Trichet criticized them
as “insufficient.” He thus does not appear in the mood to step off the
bully pulpit as the proposals move to the European Parliament.
Japan’s Finance Minister Noda said the G7 teleconference called for
by Lagarde will start at 22h00 GMT/18h00 EDT on Thursday evening.
Any possible agreement between G7 nation would likely be aimed at
preventing an excessive appreciation of the yen against the dollar.
Since an ECB rate increase is largely priced into exchange rates, a
decision to scrap the April hike would likely help push up the dollar,
giving some relief to the Japanese currency.
However, it seems unlikely any concrete demands would be made on
the ECB regarding its interest rate policy. Some kind of coordinated
currency intervention deal would seem more likely.
In keeping with its principle of separation between monetary policy
and liquidity operations, the ECB could also offer support by opening
liquidity lines if needed, without having to call off the rate hike.
–Frankfurt newsroom +49 69 72 01 42; e-mail: jtreeck@marketnews.com
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