Morning Bid: ECB may stumble into stimulus

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By Mike Dolan, Editor-At-Large, Financial Industry and Financial Markets

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World markets are entering March with Friday's alarming Oval Office row reverberating on both sides of the Atlantic, raising more questions about increasingly unpredictable geopolitics just as investors are also turning anxious about a potential economic slowdown.

Tuesday's U.S. tariff deadline, labor market updates and China's National People's Congress will all jockey for attention this week. But I'll delve into the European Central Bank's likely interest rate cut on Thursday for today's spotlight.

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Few doubt the European Central Bank will cut interest rates again this Thursday, but there are fears in the ECB ranks that easing much further after that may see it inadvertently stumble into stimulative territory before inflation has been licked.

And pity the poor central banker trying to work it out. 

Much like its peers around the world, the ECB is due to review policy again and issue a series of long-term forecasts even though it barely knows what the economic or political backdrop will be next month.

Uncertainty about potential U.S. tariffs, the identity of the new German government, the fate of Ukraine and a likely new public spending boost to re-arm the continent are all fogging up ECB eyeglasses considerably.

As it would probably admit itself, staff forecasts at this juncture are little more than a finger in the wind.

Further complicating things is the fact that several critical macroeconomic inputs used to assess the ECB's inflation outlook have been swinging back and forth wildly this year.

Take European natural gas prices.

From the middle of January, they rocketed about 30% higher, only to reverse all that by the middle of last month. 

As Rabobank economists note, the ECB likely sealed its new macroeconomic projections when gas prices were at a peak in the middle of February - embedding gains of some 140% year-on-year as opposed to 85% now. 

The macro mist simply forces the central bank to seek other lodestars to guide its policy deliberations, and hence its recent obsession with the much-maligned and nebulous 'neutral' interest rate concept.

Graphics are produced by Reuters.

So-called R*, the interest rate present when an economy is at full employment with stable inflation, is highly dependent on model assumption and impossible to identify in real time. But this theoretical figure at least offers policymakers some idea of whether existing policy is restrictive or stimulative.