ECB's house price headache too big to solve
Skip to main content
  • Home
  • Economy
  • Stocks
  • Analysis
  • World+Biz
  • Sports
  • Features
  • Epaper
  • More
    • Subscribe
    • COVID-19
    • Bangladesh
    • Splash
    • Videos
    • Games
    • Long Read
    • Infograph
    • Interviews
    • Offbeat
    • Thoughts
    • Podcast
    • Quiz
    • Tech
    • Archive
    • Trial By Trivia
    • Magazine
    • Supplement
  • বাংলা
The Business Standard

Monday
July 04, 2022

Sign In
Subscribe
  • Home
  • Economy
  • Stocks
  • Analysis
  • World+Biz
  • Sports
  • Features
  • Epaper
  • More
    • Subscribe
    • COVID-19
    • Bangladesh
    • Splash
    • Videos
    • Games
    • Long Read
    • Infograph
    • Interviews
    • Offbeat
    • Thoughts
    • Podcast
    • Quiz
    • Tech
    • Archive
    • Trial By Trivia
    • Magazine
    • Supplement
  • বাংলা
MONDAY, JULY 04, 2022
ECB's house price headache too big to solve

World+Biz

Reuters
07 February, 2020, 01:35 pm
Last modified: 07 February, 2020, 01:37 pm

Related News

  • Ukrainian refugee influx could ease euro zone labour shortage: ECB
  • ECB meets to tackle rout in bond market amid echoes of debt crisis
  • ECB sees inflation stabilising around 2% target: Economist
  • ECB puts Russians in EU under scanner
  • Centeno says ECB needs to keep monitoring inflation, stand ready to act

ECB's house price headache too big to solve

Reuters
07 February, 2020, 01:35 pm
Last modified: 07 February, 2020, 01:37 pm
Specialists work on a crane in front of the European Central Bank (ECB) in Frankfurt, Germany, January 23, 2020. REUTERS/Ralph Orlowski/File Photo
Specialists work on a crane in front of the European Central Bank (ECB) in Frankfurt, Germany, January 23, 2020. REUTERS/Ralph Orlowski/File Photo

What if vital inflation data used to justify trillions of euros worth of central bank stimulus to support Europe's economy is flawed?

This is precisely the European Central Bank's fear as it starts a one-year forensic review of its unprecedented foray into unconventional monetary policy in recent years.

The problem centers on house prices.

They are a key measure for tens of millions of homeowners and changes in prices affect their financial decisions and their overall perception of inflation and economic health.

Yet, unlike the United States, the monthly "headline" inflation data used by the euro zone central bank to help determine whether and when to intervene to shore up the economy excludes changes in the price of homes occupied by their owners.

As a result, the data underestimated the actual price increases households faced during the current housing boom, which was partly fueled by rock-bottom central bank rates.

For the ECB, there are two ways out but neither looks promising: Eurostat, the EU statistics agency could fix the data or the ECB itself could target a different inflation measure.

The first appears highly unlikely, and the second so politically and economically risky, that the ECB's review is likely to just kick the can down the road, according to many economists.

At the core of the problem lies how Eurostat calculates the harmonized index of consumer prices (HICP), a measure that combines prices in 19 euro zone members into a single reading.

The importance of the figure can't be understated: The ECB targets this figure and has spent trillions of euros to cut borrowing costs because it is undershooting its aim of almost 2%.

If housing was included, inflation could be 0.2 to 0.3 percentage points higher. That may not seem much but would have pushed it closer to the ECB's target in recent years, weakening the case for stimulus.

The issue is that housing costs only get a 6.5% weight in the euro zone inflation basket - and that is largely from changes in rental prices - while it has over 20% in the U.S. Federal Reserve's preferred inflation measure.

The Eurostat figures excludes changes for so-called owner-occupied housing, data which is produced only quarterly and with a three-month lag. The United States overcomes this by calculating an imputed rent for owner-occupied housing.

'ASK ANYONE, FAMILY, FRIENDS'

New ECB President Christine Lagarde is fully aware of the problem.

"If you ask anyone, family, friends and beyond, 6.5% is on the low side, to say the least," she told European lawmakers on Thursday.

"We have to be mindful of being true to what people regard as their cost structure," Lagarde said. "If housing costs represents that little, we have to question and wonder whether that's legitimate or not."

Eurostat declined to comment.

There is no easy way for the statistic agency to resolve this issue.

A 2018 report by the European Commission concluded that even if methodological concerns could be overcome, the data can't be produced as quickly and as frequently as inflation.

"Historically, the issue is how do you capture the fact that if you own a home that is partly consumption and it should be in the price index," Philip Lane, the ECB's chief economist said.

"But partly it is an asset which should not be in the price index."

SHIFTING THE GOALPOSTS

The ECB could look for a new inflation measure to target but that may be a minefield.

Jonás Fernández, a Member of the European Parliament already called out the ECB, arguing that shifting the goalposts when the ECB is falling short of its target could be seen as dishonest.

Another issue is that house prices rise more during economic booms but can fall in downturns.

Should house prices be factored into headline inflation, this could compound deflationary pressures in a downturn, forcing the ECB to provide even more stimulus, not less.

Indeed, the gap between headline inflation and the figure adjusted for house prices seems to be closing as the euro zone economy struggles, weakening the case for tackling this methodological issue now.

Any move to target an inflation figure other than headline inflation would also risk making the ECB's target even more confusing for the public, running counter to the bank's aim of simplifying it.

Given that the ECB would gain relatively little by targeting a new measure, it is likely to keep the pressure on Eurostat and settle in for a lengthy battle that will last well beyond its strategy review.

"The ECB cannot decide on such a change to the HICP alone," Commerzbank economist Ralph Solveen said.

"A change in the survey method must be approved not only by the European Commission, but also formally by the European Parliament and the European Council."

Top News / Global Economy

European Central Bank (ECB) / house price

Comments

While most comments will be posted if they are on-topic and not abusive, moderation decisions are subjective. Published comments are readers’ own views and The Business Standard does not endorse any of the readers’ comments.

Top Stories

  • China’s new Covid flareup threatens crucial economic region, raising supply chain worries
    China’s new Covid flareup threatens crucial economic region, raising supply chain worries
  • Photo: BSS
    Make sure that no one suffers: PM asks partymen
  • Launches see drastic fall in Eid ticket sales   
    Launches see drastic fall in Eid ticket sales   

MOST VIEWED

  • Tata Motors' electric sport utility vehicle (SUV) Nexon EV on show during its launch in Mumbai, India, January 28, 2020. REUTERS/Hemanshi Kamani/File Photo
    Tata Motors aims to sell 50,000 EVs in this fiscal yr
  • Wads of British Pound Sterling banknotes are stacked in piles at the Money Service Austria company's headquarters in Vienna, Austria, November 16, 2017/ Reuters
    Improved risk sentiment lifts euro, sterling
  • A man wearing a protective mask, amid the coronavirus disease (COVID-19) outbreak, walks past an electronic board displaying graphs (top) of Nikkei index outside a brokerage in Tokyo, Japan, March 10, 2022. REUTERS/Kim Kyung-Hoon
    Stocks up in holiday mood on resurgent oil
  • Shireen Abu Akleh. Photo: Reuters
    Al Jazeera reporter likely killed by unintentional gunfire from Israeli positions, US says
  • An ambulance and armed police stand outside Field's shopping centre, after Danish police said they received reports of shooting, in Copenhagen, Denmark, July 3, 2022. Ritzau Scanpix/Olafur Steinar Gestsson via REUTERS
    Gunman behind Copenhagen shooting jailed for 24 days
  • A man rides his trishaw loaded with empty plastic barrels which are used to carry oil in the western Indian city of Ahmedabad March 10, 2011. REUTERS/Amit Dave/Files
    India takes number of steps to address high oil price challenge

Related News

  • Ukrainian refugee influx could ease euro zone labour shortage: ECB
  • ECB meets to tackle rout in bond market amid echoes of debt crisis
  • ECB sees inflation stabilising around 2% target: Economist
  • ECB puts Russians in EU under scanner
  • Centeno says ECB needs to keep monitoring inflation, stand ready to act

Features

Last month Swapan Kumar Biswas, the acting principal of Mirzapur United College, was forced to wear a garland of shoes for ‘hurting religious sentiments.’ Photo: Collected

Where do teachers rank in our society?

10h | Panorama
Japanese Ambassador Naoki Ito. Sketch: TBS

'The game-changing projects are in line with the Bay of Bengal Industrial Growth Belt initiative'

12h | Panorama
A Glittery Eid

A Glittery Eid

1d | Mode
Rise’s target customers are people who crave to express themselves through what they wear, and their clothing line is not relegated to any age range.

Level up your Eid game with Rise

1d | Mode

More Videos from TBS

Realme Narzo 50A Prime available now

Realme Narzo 50A Prime available now

55m | Videos
Export products to get diversified

Export products to get diversified

2h | Videos
Horrible routes of human trafficking

Horrible routes of human trafficking

3h | Videos
Why Mbappe cheated Real Madrid

Why Mbappe cheated Real Madrid

3h | Videos

Most Read

1
Meet the man behind 'Azke amar mon balo nei'
Splash

Meet the man behind 'Azke amar mon balo nei'

2
TBS Illustration
Education

Universities may launch online classes again after Eid

3
Padma Bridge from satellite. Photo: Screengrab
Bangladesh

Padma Bridge from satellite 

4
Photo: Collected
Economy

Tech startup ShopUp bags $65m in Series B4 funding

5
World Bank to give Bangladesh $18b IDA loans in next five years
Economy

World Bank to give Bangladesh $18b IDA loans in next five years

6
Investor Hiru fined Tk2cr for market manipulation
Stocks

Investor Hiru fined Tk2cr for market manipulation

EMAIL US
contact@tbsnews.net
FOLLOW US
WHATSAPP
+880 1847416158
The Business Standard
  • About Us
  • Contact us
  • Sitemap
  • Privacy Policy
  • Comment Policy
Copyright © 2022
The Business Standard All rights reserved
Technical Partner: RSI Lab
BENEATH THE SURFACE
Sun Drying Paddy in Monsoon: Workers in a rice mill at Shonarumpur in Ashuganj arrange paddy grains in lumps on an open field to dry out moisture through sunlight. During the rainy season, workers have to take cautions so that the grains do not get wet in the rains. Photo: Rajib Dhar

Contact Us

The Business Standard

Main Office -4/A, Eskaton Garden, Dhaka- 1000

Phone: +8801847 416158 - 59

Send Opinion articles to - oped.tbs@gmail.com

For advertisement- sales@tbsnews.net