ECB to focus on bond-buying exit as threats mount
AFP – European Central Bank President Mario Draghi will press ahead with his exit from massive stimulus Thursday, analysts expect, playing down multiplying threats to economic good times in the eurozone.
The list of potential pitfalls runs from a growing intra-EU row over the Italian 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 stuck to his judgement that positive and negative risks were "broadly balanced", the record demonstrated discord among the 19 national central bank chiefs and six board members who set policy.
For ING Diba bank economist Carsten Brzeski, "even though recent developments have been anything but encouraging, the downside risks are simply too minor and too premature for the ECB to alter its chosen path".
– 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 like wage increases.
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 of the threats to growth mean QE may well end before any of them materialise.
A US-EU row on import tariffs Washington imposed on metals imports and threatened on the transatlantic car trade 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 declined Monday to heed Brussels’ warnings about its swelling deficit or last week’s credit rating downgrade from Moody’s.
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 forecasts for eurozone expansion — like the IMF’s prediction of 2.0 percent growth in 2018 and 1.9 percent next year — so drastic that they should undermine inflation.
"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 economist Brzeski concluded.