ECB CAN ONLY REST UNEASY / THE WALL STREET JOURNAL

Heard on the Street

ECB Can Only Rest Uneasy

Little Bank Can Do Now Except Wait and See

By Richard Barley

June 30, 2014 10:01 a.m. ET


The European Central Bank's guns are set to fall silent this week after June's policy barrage.

The ECB looks set for a nervous few months, as data continue to point to extremely low inflation, limp monetary dynamics and few signs of a pickup in growth. The headline figures mask some glimmers of hope—but they are only faint as yet.

Annual inflation in the euro zone in June was just 0.5%, unchanged from May, and still way below the ECB's target of "below, but close to" 2%. But June's figure was the first for many months that didn't prove disappointing relative to market expectations, a small positive step.

Indeed, inflation could be close to bottoming out—although a sustained rise seems some way off. German inflation picked up sharply, rising to 1% from 0.6%, a welcome development given extremely weak inflation elsewhere. The drag on inflation from energy prices appears to be fading, although declining food prices may continue to weigh. But core inflation, which strips out food, energy, alcohol and tobacco, rose to 0.8% in June and has been broadly stable around this level since last October.

Meanwhile, the ECB's monetary statistics showed a continued contraction in the stock of bank lending to the private sector, but crucially at a slower pace. As a result, the so-called credit impulse, which looks instead at the flow of new lending relative to spending in the economy, has turned positive this year, Crédit Agricole notes. Coupled with wide-open bond markets and signs of increasing demand for borrowing, this may bode well for a pickup in investment and growth over time.

But these are slender supports. On the growth side, some survey data has proved wobbly: the latest was Friday's euro-zone Economic Sentiment Indicator for June, which unexpectedly fell back.

France is stagnating at best and even Germany appears to have lost a little momentum. That said, there were encouraging signs that crisis-hit countries are faring better; in Greece the indicator is above its long-term average for the first time since August 2008.

The ECB can't rest easy. But having just cut rates, announced a targeted lending operation for later this year and trailed potential purchases of asset-backed securities, there is little the central bank can do now except wait and see.