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‘Exciting’ ECB meet could bring end to bond-buying
FRANKFURT AM MAIN, June 12, 2018 (BSS/AFP) – The European Central Bank may
announce Thursday a timetable for withdrawing its massive support for the
eurozone economy, analysts say, although looming threats to the bloc could
stay its hand for a few more weeks.
Central bankers’ monthly bond purchases of 30 billion euros ($35 billion)
and ultra-low interest rates are designed to stoke growth in the 19-nation
single currency area and power inflation to their target of just below 2.0
percent.
Growth has picked up across the bloc, although at a slower pace in early
2018 than last year — 0.4 percent between January and March compared with
0.7 percent in the previous three months.
Meanwhile, eurozone price growth surged to 1.9 percent in May, in line
with the ECB’s target.
“Core” inflation discounting the most volatile elements remains weak, but
the data suggest that over 2.4 trillion euros of “quantitative easing” (QE)
or mass bond-buying since 2015 has dispelled the risk of deflation, or a
downward spiral of prices braking economic activity.
At their Thursday meeting in Latvian capital Riga, “the governing council
will have to assess whether progress so far has been sufficient to warrant a
gradual unwinding of our net purchases” of bonds, top ECB economist Peter
Praet said last week.
Central bank President Mario Draghi has until now said governors did not
even discuss a possible exit from QE at their gatherings.
That makes the topic’s appearance on the agenda an important signal that
the end is approaching.
“After Praet’s remarkable speech, we expect a very exciting meeting on 14
June,” ING Diba bank economist Carsten Brzeski said.
– Litany of threats –
But policymakers may not yet be convinced that the time is right to remove
the training wheels completely.
MORE/MR/ 1208 hrs
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The current list of threats to the eurozone ranges from the new Italian
government’s unpredictable spending policies, which could pitch the bloc’s
third-largest economy into a financial crisis, to the prospect of a failure
to reach a Brexit deal with London.
An acrimonious end to the G7 summit on Saturday heightened the risk of a
tit-for-tat trade war between EU nations and US President Donald Trump, while
higher oil prices could weigh on future growth.
What’s more, “recent data on business activity have not been strong enough
to rule out further disappointment on the growth outlook — a risk that the
ECB would find difficult to respond to” if it ties itself to a fixed exit
strategy from bond-buying, said economist Frederik Ducrozet of Pictet bank.
Against that background,” “a ‘flexible tapering’ (winding down bond
purchases) announcement is more likely than an unconditional commitment to an
end date for QE,” on Thursday, he predicted.
“We still don’t think the ECB will easily give away flexibility and room
for manoeuvre on QE,” Brzeski agreed.
Analysts are divided about what exactly such flexibility would look like,
and whether policymakers will make their move this month or next.
Draghi could announce a gradual reduction of purchases to zero over
several months but leave his options open to increase them again.
Or the ECB could opt for an open-ended extension of bond-buying beyond the
current cutoff date of September, but at a slower pace than the present 30
billion euros per month.
How the institution communicates its retreat from QE will be watched
closely by investors.
The central bank has long said interest rates will not rise until “well
after” the end of bond purchases — meaning whether or not the institution
names an end date could have big implications for financial markets.
BSS/AFP/MR/ 1208 hrs