ZCZC
BCN-02
ECB-EU-EUROZONE-RATE
Economists see ECB cornered into new stimulus broadside
FRANKFURT AM MAIN, Sept 10, 2019 (BSS/AFP) – The European Central Bank is
set to unveil fresh monetary easing at a meeting Thursday, analysts agree,
under pressure from markets to deliver support to a flagging eurozone
economy.
It could be a last major move by ECB chief Mario Draghi before handing the
reins to outgoing International Monetary Fund chairwoman Christine Lagarde on
October 31.
The single currency is not as fragile as when Draghi promised “whatever it
takes” to save it in 2012 — peaking in a 2.6-trillion-euro bond-buying
scheme from 2015-18 and negative rates on banks’ deposits in Frankfurt.
But central bankers have for years failed to hit their inflation target of
just below 2.0 percent, despite unprecedented interventions.
And now growth is slowing as the eurozone confronts US-led trade wars,
weakness in emerging markets and the risk of a no-deal Brexit.
In the second quarter, economic activity in the bloc expanded by just 0.2
percent compared with January-March, while annual inflation fell to 1.0
percent in July. Its leading economy, Germany, is forecast to slide into
recession in the third quarter.
Policymakers’ insistence that their goal still holds — and Draghi’s June
declaration that the ECB could even aim to overshoot it, compensating for
years of below-target price growth — have prompted high expectations for
September action on financial markets.
“If the ECB were to disappoint in September, it would need to do more
later, with lower chances of success,” said Pictet Wealth Management
strategist Frederik Ducrozet.
He pointed especially to the risk of markets’ expectations for future
inflation becoming “de-anchored” from the central bank’s aim.
The resultant bets on lower future inflation could turn into self-
fulfilling prophecies.
Ducrozet suggested Draghi could announce 600 billion euros ($660 billion)
worth of new bond purchases, as well as a cut in the deposit rate banks pay
to park cash with the ECB, from -0.4 to -0.5 percent.
But “dissensions within the governing council could lead to a sub-optimal
decision” that leaves asset purchases for another day, he added.
– Council divided? –
Governors from the weightiest eurozone nations, including France, Germany
and the Netherlands, are sceptical about new bond-buying.
“Is it necessary to restart purchases immediately? That’s a question we’ll
have to discuss,” Bank of France head Francois Villeroy de Galhau said last
week.
Villeroy is normally seen as one of the council’s “doves”, more favourable
to monetary easing than so-called “hawks”, who mainly hail from northern and
German-speaking Europe.
The German and Dutch central bank chiefs have also spoken up in recent
weeks.
And ECB vice-president Luis de Guindos insisted in late August that the
institution is “data-dependent”.
“Indications from market expectations cannot replace our policy judgement,”
de Guindos said.
For his part, Draghi has stoked confidence in a policy move at public
appearances over the summer.
In July he reiterated that governors were weighing the “possibility of
actions in the future, if there is no improvement” in economic conditions.
New ECB staff growth and inflation forecasts, expected to be lower than in
June, will provide fodder for the doves’ arguments at this week’s meeting.
The June outlook already trimmed predictions for both measures, with prices
expected to grow just 1.6 percent in 2021 — far short of the target.
– Lower for longer –
Whatever the decision, policymakers will tweak their “forward guidance” on
future policy to set markets’ expectations for how long low interest rates
will last.
If the ECB launches asset purchases, it will likely tie any rate hike to
their coming to an end.
That could leave Lagarde with room only to ease further in her first year
or more of taking office.
To quiet inevitable grumbles from banks about low rates, many analysts
expect the ECB to introduce a “tiering” system exempting some deposits from
the charges, which amount to more than seven billion euros per year.
“The central bank will have to strike a balance between conflicting goals:
to provide sizable relief to banks, to leave enough liquidity to keep
monetary conditions easy and to avoid unwarranted tightening,” said economist
Marco Valli of UniCredit.
BSS/AFP/FI/1215 hrs