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ECB watchers bet on bond-buying exit hint
RIGA, June 14, 2018 (BSS/AFP) – Many observers expect the European Central
Bank on Thursday to announce, or at least hint strongly, that the end is nigh
for its massive support for the eurozone economy, although looming threats to
the bloc will weigh on governors’ minds.
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.
ECB 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, alongside the latest
growth and inflation forecasts, an important signal that the end is
approaching.
“They will probably want to take this opportunity while the situation
looks relatively calm, while the economy still seems to be growing at a pace
that’s above potential” to wind down purchases, Capital Economics analyst
Jennifer McKeown told AFP.
– Litany of threats –
But policymakers may not yet be convinced that the time is right to remove
the training wheels completely.
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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.
Counterintuitively, “developments in Italy could make the ECB want to
announce the fastest possible exit from QE” to finally escape northern
European suspicions it has prolonged the programme to spare Draghi’s home
country financial woes, Bank of America Merrill Lynch analyst Gilles Moec
told AFP.
But fears for the sustainability of Italy’s debt mountain have calmed
since Economy Minister Giovanni Tria ruled out an exit from the euro Sunday.
Meanwhile, there has been “no market response” to the collapse of the G7
gathering, Capital Economics’ McKeown noted, limiting its importance as the
ECB weighs its move.
On the other side of the equation, economist Frederik Ducrozet of Pictet
bank noted that “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.
That means “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.
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 some investors.
BSS/AFP/HR/1025