Wednesday, June 6, 2012

Draghi gives a new meaning to "behind the curve"

Bloomberg/BW: - The European Central Bank left interest rates on hold as the debt crisis tightens its grip on the euro-area economy, increasing pressure on policy makers to deliver further stimulus.
“The ECB might want to wait for further corroborating data to conclude that its second-half-of-the-year recovery expectations are challenged,” said Silvio Peruzzo, an economist at Royal Bank of Scotland in London. “We do not exclude the possibility that the ECB might pre-announce it this week, recognizing the increasing downside risk to the economy.”
Wait for further corroborating data? The Eurozone PMI came out yesterday, pointing to a sharp deterioration across the Eurozone. Waiting for the GDP numbers when you have a reliable leading indicator (as can be seen from the chart below) borders on irresponsible.

Source: Markit Partners

What's more, it's not just the Eurozone periphery which is experiencing a contraction. France's PMI is showing that the nation's economy is in real trouble. The GDP is sure to follow.

Source: Markit Partners
Mario Draghi: - “The baseline scenario in our staff projections didn’t change. At the same time, we have to acknowledge that the baseline scenario is based on assumptions. After the cut-off date of these projections” we had “confidence indicators and they all point in a direction that wasn’t upward.” At the same time, hard data were more positive. “You have conflicting signals. We are fully aware that the most recent soft data are on the downside. We monitor all developments closely and we stand ready to act.”
So obviously Draghi and company have seen the PMI numbers. But because they came "after the cut-off date" the PMI numbers can't be used for policy decision? Are they saving it for the next meeting? It's a strange way to run policy and may further damage the ECB's credibility. The Fed has been accused of being "behind the curve" in the past, but this takes the phrase to a whole new level.
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