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Thursday, March 28, 2024

ECB Credibility Crumbles As “Significant Minority” Of Governors Say Growth Projections “Overly Optimistic”

Courtesy of ZeroHedge. View original post here.

When the ECB slashed its growth forecast for 2019 from 1.7% to 1.1% of GDP back in March, some observers questioned the logic behind Mario Draghi’s insistence that the headwinds facing the eurozone economy would dissipate during the second half of the year, chalking it up to more of that signature European ‘magical thinking’.

Now it appears that several of Draghi’s fellow policy-setters would agree with these critics. To wit, according to Reuters, one of the ECB’s favorite trial balloon transmission mechanisms, a “significant minority” of Draghi’s fellow policymakers have thrown up all over the latest ECB forecast for 2019 – which was echoed by the IMF – claiming off the record that it was unjustifiably rosy, and seeing little chance that the second half rebound promised by Draghi would materialize.

Some policymakers went so far as to shoot what’s left of the central bank’s credibility in the foot, or any other bodily organ and/or appendage, and questioned whether the ECB’s projection models should be revisited. And while Draghi was reportedly open to discussing these concerns, he remains opposed to a revamp of the central bank’s methodology for obvious reasons as it would suggest that just like the Fed, the ECB is similarly just as clueless.

As Reuters reports, a “significant minority” of rate-setters in last week’s policy meeting “expressed doubt that a long projected growth recovery is coming in the second half of the year and some even questioned the accuracy of the ECB’s projection models, given their long history of downward revisions.”

With the ECB using the these projections as a key input into policy decision, more cuts in growth and inflation forecasts would raise the chance that the bank’s first post crisis rate, now seen next year, is delayed even longer.

[…]

Some governors went as far as saying that the ECB’s forecasting methodology may need to be reviewed since projections are persistently too optimistic and are regularly cut quarter after quarter, the sources said. The ECB now sees 2019 growth at 1.1 percent but projected 1.7 percent just three months ago.

While others are also prone to forecasting errors, the U.S. Federal Reserve does not publish a single projection, even if individual governors make their forecasts public. And while Fed governors also erred on growth recently, their projections on inflation have been relatively solid.

Some ECB policymakers thought there may be an inherent bias in the bank’s forecasts as they always show inflation on an upward slope, moving toward the ECB’s target and growth returning to trend.

Their concerns include the possibility that trade wars might be permanent, and that a one-off hit to the German auto sector might last longer than some have said.

While Germany’s vast car sector did take a one-off hit from an adjustment to new emissions-testing methods, more permanent factors could include shifting consumption habits, a move away from diesel and weak Chinese demand, some governors argued, according to the sources.

The policymakers added that weak global trade growth also appears to be more permanent, trade wars now look to be the norm rather than the exception and even if Chinese growth looks to be stabilizing, demand from Beijing is unlikely to surge.

Meanwhile, a second trial balloon released on Tuesday further undermined confidence in Draghi as the ECB chief prepares to step down, when his second term ends later this year.

According to a parallel report by Bloomberg, several board members are unenthusiastic about the prospect of adopting interest-rate “tiering”, which has been all the rage recently in terms of additional stimulus measures, and represents a  policy that – just like in Japan and Switzerland – would alleviate pressure on European banks and contribute to the further ‘Japanification’ of Europe.

Though no proposals have been made on the matter yet, and the topic was conspicuously missing from last week’s ECB press conference, it had been reported that this option was explored as part of a review of the central bank’s policy of negative interest rates after Draghi surprised investors last month by calling on the bank to “reflect” on a policy revamp.

Draghi didn’t consult the Governing Council before his remarks last month, and while he didn’t mention rates tiering by name, the comments prompted speculation that the ECB could introduce a version of the policy, which is already being used in Japan, Switzerland and Denmark.

Given the central bank’s surprisingly dovish turn in March, where it communicated that rates would now be on hold at least through the end of the year and announced another round of TLTROs, we can’t help but wonder if there’s a mutiny brewing inside the central bank, and whether Draghi’s legacy as ECB chief could be seriously undermined during his last months at the helm.

The euro tumbled on the Reuters’ headline, but then it promptly rebounded higher when the BBG story hit:

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