If you’re inclined to couch everything in hyperbolic terms, Mario Draghi faced a veritable “rebellion” at the latest ECB meeting. “Rebellion” is probably a bit strong, considering we’re talking about monetary policy deliberations, not the storming of any ramparts, but regardless, there was dissension.
But the latest read on inflation seemingly underscores the extent to which Europe is trudging slowly down the road to Japanification, which ostensibly makes the case for more monetary easing, in line with the new package of measures announced last month.
Flash September CPI printed just 0.9% YoY, missing estimates and falling further away from the central bank’s target. The core read was 1%. It was the first time core eclipsed the headline rate since 2016.
Final PMIs for Europe out Tuesday confirmed the gloomy picture painted by the initial estimates, which, you’re reminded, included a 123-month low on IHS Markit’s factory gauge for Germany and similarly underwhelming (if not wholly disastrous) reads on French manufacturing and services.
The irony, as ever, is that while the ongoing deceleration in both inflation and growth across the pond will be cited as “evidence” in favor of more monetary accommodation in the service of avoiding “Japanification”, that kind of accommodation has proven wholly ineffective in Japan, where the BoJ hasn’t come anywhere close to hitting their inflation target on a sustainable basis, despite cornering the JGB market.
This is why calls for fiscal stimulus in Europe are now quite shrill – including from Draghi himself.
Meanwhile, South Korea faces deflation for the first time ever amid a 10th consecutive month of plunging exports. CPI flatlined in August, and a push below zero was expected (and flagged by the BoK), but it’s nevertheless a notable development. CPI fell 0.4% in September from a year earlier. That was worse than the median estimate (-0.3%). Again, that’s the first negative inflation print since data began in 1965.
Some argue this is a product of a relative policy mix rarity. “South Korea is in the rare situation where fiscal policy is expansive, but monetary policy is too cautious”, Bloomberg’s Daniel Moss wrote, in an opinion piece published Tuesday. “Usually the problem is the other way around”, he adds.
In July, the BOK slashed its economic forecasts in the course of cutting rates, and exports remain in a tailspin. The country has struggled mightily in the face of global trade frictions. Jitters about a turning of the semi cycle have made things worse. The diplomatic spat with Japan was just insult to injury.
The BOK held off on another rate cut at its last meeting, but flat-lining inflation should help make the case for additional accommodation going forward. “There is some room in monetary policy to respond to economic situations if necessary”, Governor Lee told reporters in August, following the decision to hold off on further cuts for the time being.
Clearly, the October 16 meeting is now on the table for another rate cut and the pressure is mounting, despite the fact that the negative CPI print for September (and expected further near-term weakness) is seen as the product of base effects and temporary factors.
“Optically weak inflation, coupled with continued fall in inflation expectations, likely support an October rate cut”, Barclays said Tuesday, adding that “while demand-side inflation remains weak, we still believe the bigger issue lies with falling inflation expectations”. The September data revealed another record low print on that score at 1.8%.
Some are calling for more than just the obligatory 25bp cut. “The BOK could cut rates by half a point, rather than the generic quarter-point job, and pledge they will stay at that level (or lower!)”, the above-mentioned Moss exclaims, suggesting that the central bank should employ some “proper” forward guidance that explicitly ties monetary policy to the end of the trade war.
Of course, that’s a dangerous route to go. After all, only the dead have seen the end of war.