Yahoo Finance Too Many ECB Cuts Risk Spooking Markets, Allianz Chief Economist Says
(Bloomberg) -- The European Central Bank risks a backlash from investors if its interest-rate policy strays too far from that of its US counterpart, according to Allianz Chief Economist Ludovic Subran.
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Speaking Thursday on Bloomberg Television, he told Dani Burger and Manus Cranny that Frankfurt-based officials face a quandary balancing the need to ease constriction on the economy and avoiding fallout from the “US financial vortex.”
“There is a risk a bit of, I won’t say capital flight, but of a desynchronization of central banks that would be hard to swallow for Europe,” Subran said. “There are all the reasons for the ECB to cut in June; there are all the reasons for them to cut maybe only 50 basis points this year.”
Against a backdrop of financial markets trimming bets for easing by US officials led by Chair Jerome Powell, his ECB peer Christine Lagarde and colleagues meeting in Frankfurt on Thursday are poised to firm up preparations for an initial rate reduction in June.
Subran reckons that if the euro zone cuts by 100 basis points this year and that weren’t mirrored by the Fed, the outcome would be a “quite massive” 4-5% depreciation of the single currency. Moving by even half that amount would still be “quite a bold move.”
“I would be worried about markets overreacting to this more than the actual effect in the lending or the financial difference between the US and the European markets,” Subran said. “But you know what, we have to cut. For us it’s almost impossible not to cut, because services inflation is sticky right, but all the rest is going down quite fast.”
Even so, the ECB will need to be “very gradual” — and a surge in the oil price could yet limit how far it can ease. Subran reckons $10 more per barrel for crude adds almost 1.2 percentage point to the inflation rate in the euro zone.
“Much more vibrant energy markets could mean that the ECB is maybe allowed to cut once this year and that would be also quite a drag when you look at growth forecasts,” he said. “There is this hypothesis of a rebound on real income on the second half that would be completely annihilated should we have another energy shock.”
The Fed itself is in a bind because faster-than-expected inflation makes it hard to cut, but it would still need to deliver any possible easing sooner to “decouple” its decisions from the US presidential election in November, Subran said.
“If Trump gets re-elected, he re-heats the US economy and the Fed may have to halt its loosening cycle anyhow,” he observed. “So the question is whether there’s the need to front-load some of those cuts or whether we can sit that one out.”
For the ECB, that backdrop means that even the timing of the Fed’s decision in June after its own meeting poses a challenge amid the “fear of going first.”
“It’s a bit like Schrodinger’s cat,” he said. “The ECB Governing Council may have to cut not knowing what Powell is going to do 10 days later.”
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