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ECB to hold firm through trade war fears
FRANKFURT AM MAIN, July 26, 2018 (BSS/AFP) – European Central Bank
governors meet Thursday in the shadow of a looming transatlantic trade war,
which may shade the institution’s outlook but is unlikely to discourage it
from ending massive stimulus for the eurozone come December.
The gathering comes a day after European Commission President Jean-Claude
Juncker met US President Donald Trump in Washington after a tit-for-tat round
of tariffs from Washington and Brussels.
Following their talks, the pair announced a series of joint steps
Wednesday to defuse the escalating row between the two trading blocs.
Declaring a “new phase” in relations, Trump said the US and EU agreed to
“work together toward zero tariffs” on non-auto industrial goods, while the
EU would import more American natural gas and soybeans.
Both men also said they would hold off on any new tariffs while
negotiations continued.
ECB President Mario Draghi has repeatedly warned that “downside risks to
the (economic) outlook mainly relate to the threat of increased
protectionism”, and will likely reiterate the warning when he appears before
journalists at 1230 GMT.
He may also address Trump’s Twitter allegation last week that “China, the
European Union and others have been manipulating their currencies and
interest rates lower… taking away our big competitive edge”.
“Draghi will likely have pointed responses, since we know he’s sensitive
about questions relating to central bank independence and G20 commitments,
especially on avoiding manipulation of currencies,” one ECB watcher at a
major European bank told AFP.
– ‘A long way to go’ –
Away from the White House fireworks, Draghi’s “main focus… will be on
cementing the message from June” that the bank is withdrawing its support in
response to the strength of the economy and its confidence it will eventually
meet its inflation target, economist Carsten Brzeski of ING Diba bank
predicted.
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The Italian banker surprised observers last month by announcing the ECB
will slash monthly purchases of government and corporate bonds from 30
billion euros ($35 billion) to 15 billion from October, before ending them at
the end of the year.
Alongside ultra-low interest rates, bond-buying or quantitative easing
(QE) was designed to pump cash through the financial system and into the real
economy, stoking growth and in turn powering inflation towards the central
bank’s 2.0 percent price stability target.
After more than three years and some 2.4 trillion euros of QE, eurozone
inflation hit 2.0 percent in June after 1.9 percent in May.
But with their eyes on meeting the target over the medium term, ECB
policymakers are unlikely to budge from plans to leave interest rates at
their historic lows — the other pillar of its support to the economy —
until at least summer next year.
The latest ECB projections see annual inflation hovering at 1.7 percent
between this year and 2020 — meaning “the ECB still has a long way to go, to
say the least”, Brzeski said.
– Wiggle room –
Having scheduled the exit from QE for December and leaving interest rates
at historic lows until long after that, “there isn’t much traditional
ammunition in the ECB’s arsenal should a slow-down occur” that might risk
inflation, economist Eric Nielsen of Unicredit noted.
Concern is all the greater as the outlook is clouded by the potential
trade war and a lingering first-quarter slowdown, from 0.7 percent growth in
October to December to just 0.4 between January and March.
But central bankers were careful to leave themselves some wiggle room when
announcing their withdrawal from bond-buying.
Draghi declared the move “subject to incoming data” at June’s press
conference — giving himself cover to extend the programme further if the
eurozone economy suffers any fresh blows.
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