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Growing threats to eurozone to test ECB’s nerve
FRANKFURT AM MAIN, Oct 25, 2018 (BSS/AFP) – Multiplying signals of
turbulence ahead for the 19-nation eurozone will not keep European Central
Bank chief Mario Draghi from sticking Thursday to plans to end massive
economic stimulus, analysts expect.
The list of potential pitfalls runs from an intra-EU row over Italy’s
budget to increasing risk of a no-deal Brexit, trade tensions with the United
States, turmoil in emerging markets, rising oil prices and jumpy economic
indicators.
A major upset could threaten growth in the eurozone — and the ECB’s
years-long quest for its goal of inflation steady at just below 2.0 percent.
The official account of September’s governing council meeting showed some
members felt “a case could also be made for characterising the risks to
activity as now being tilted to the downside”.
While Draghi ultimately declared positive and negative risks “broadly
balanced”, the record showed discord among the 19 national central bank
chiefs and six board members who set policy.
Berenberg bank economist Holger Schmieding judged that “six weeks make a
difference — not enough to change policy, though,” recalling that the
minutes also showed policymakers agreed to look past “small changes” in the
economic outlook.
Draghi will give his own take on the gathering clouds in a 2:30 pm (1230
GMT) press conference.
– Inching out of stimulus –
Draghi acknowledged last month that some threats “have become more
prominent recently”.
But he told European Parliament lawmakers he was confident of hitting ECB
forecasts showing 1.7 percent average price growth between 2018 and 2020.
Capital Economics analyst Jennifer McKeown pointed out that “events since
the ECB’s last meeting might have led it to reassess the downside risks to
(economic) growth, but not necessarily inflation”, which is influenced by
longer-term factors such as wage increases.
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Policymakers’ confidence for inflation has prompted gradual steps towards
ending mass purchases of government and corporate bonds, known as
“quantitative easing” (QE).
Launched in March 2015, the scheme is designed to pump cash through the
financial system to firms and households, powering growth and, in turn,
inflation.
From 30 billion euros ($34 billion) per month, the ECB has throttled bond-
buying to 15 billion euros per month between October and December, when it is
slated to end.
Meanwhile, the central bank will keep credit flowing by leaving interest
rates at historic lows “at least through the summer of 2019” and possibly
beyond — leaving it well behind the US Federal Reserve, which is gradually
raising rates.
And some of the easy-money effect of QE will be preserved as the ECB
reinvests the proceeds from its 2.5-trillion-euro stock of bonds.
– Manageable threats –
The slow-burning nature of many threats to growth means QE may end before
any of them materialise.
A US-EU trade row over tariffs Washington imposed on metals imports and
threatened on cars has been on ice since July, although American officials
are displaying growing impatience.
Meanwhile, economists see little risk of Italy running out of buyers for
its debt, even though Rome has ignored a credit rating downgrade from Moody’s
on Friday.
But confrontation remains on the agenda after Brussels requested the
Italians present a revised budget within three weeks, the first-ever move of
its kind against an EU government.
As for Brexit, while European leaders last week blew through another
deadline to reach a deal, there is still time before the UK’s departure date
of March 29.
Nor are weakening indicators of eurozone expansion — like an October
slump in the eurozone-wide purchasing managers’ index (PMI), a forward-
looking signal on economic activity — so drastic that they should undermine
inflation expectations.
“It would definitely need a severe growth accident, an escalation of the
Italian crisis or trade tensions with tangible consequences on financial
markets before the ECB would change its course,” ING Diba bank economist
Carsten Brzeski said.
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