BCN-11,12 Eurozone headwinds to test ECB’s confidence

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Eurozone headwinds to test ECB’s confidence

FRANKFURT AM MAIN, Sept 11, 2018 (BSS/AFP) – With trade tensions, an
Italian government bucking at deficit limits and emerging market currency
woes threatening the eurozone, observers will look to the European Central
Bank for reassurance Thursday, while policymakers strive to project
stability.

Since July, when ECB President Mario Draghi proclaimed “confidence” in the
outlook for growth and inflation, “the balance of risks has become more
unfavourable,” say UBS analysts.

Back then, Draghi judged risks to growth in the 19-nation single currency
area “broadly balanced”.

On the downside, he highlighted trade tensions between the United States
and its trade partners in China and the European Union.

With President Donald Trump now threatening to hit all imports of Chinese
goods into America with tariffs, fears of a global economic slowdown
triggered by protectionism have only grown.

Elsewhere, currency crises that have flared in major emerging economies
Turkey and Argentina now risk undermining eurozone export partners like
Germany and Spain — although “the threat this turmoil poses to developed
economies seems manageable for now,” commented economist Marco Valli of
Unicredit.

And within the euro area, all eyes are on Italy, where the governing
coalition between the anti-immigrant League and anti-establishment Five Star
parties will present their budget next month.

European authorities, other capitals and financial markets fear ministers
will prioritise honouring pricey electoral promises over shrinking Rome’s
tottering debt pile of 132 percent of annual gross domestic product — more
than twice the EU target.

EU officials have reassured financial markets in recent days, but the so-
called “yield spread” — which measures the difference in perceived risk
between Italian and ultra-safe German government bonds — remains
uncomfortably high.

Draghi generally prefers not to comment on individual capitals’ fiscal
plans, but regularly calls on highly indebted countries to set aside cash for
a rainy day rather than indulging in spending sprees.

MORE/MR/ 1236 hrs

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– New forecasts –

ECB watchers will also be keen to get their hands on new forecasts from
the central bank staff looking as far ahead as 2020, but no major changes are
expected.

“The bias for possible (small) revisions appears to be to the downside,”
wrote Unicredit’s Marco Valli.

Nevertheless, “we expect ECB President Mario Draghi to reaffirm his
confidence in the sustainability of the eurozone’s economic recovery” and in
the central bank hitting its target of inflation just below 2.0 percent, he
added.

Analysts highlighted that while headline inflation reached 2.0 percent
last month, “core” inflation — which rules out volatile items like food and
energy prices — notched up just 1.0 percent.

And unemployment across the euro area remains stubbornly high compared
with other advanced economies, at 8.2 percent — limiting upward pressure on
salaries and, indirectly, prices.

– ‘Auto pilot’ –

For all the fears about risks to the growth and inflation outlook, the ECB
appears unlikely to be swayed from its plans to end massive stimulus to the
eurozone.

It announced in June that it would reduce mass bond-buying — designed to
pump cash through the financial system and into the real economy — from the
present 30 billion to 15 billion euros ($17.4 billion) per month from
October, before ending them in December.

“The auto pilot, turned on in June, should stay on” at Thursday’s meeting,
economist Carsten Brzeski of ING Diba bank said.

Neither is Draghi likely to drop more hints about when interest rates may
rise from the historic lows where they have been stuck for years.

They are set to remain there “at least through the summer of 2019,” he
reiterated last month.

More interesting for financial players could be hints about how the
central bank will reinvest the proceeds as its massive 2.5 trillion-euro
stock of corporate and government bonds matures.

Policymakers plan to buy new bonds with the payouts, hoping to influence
markets and keep debt cheap long after ending their asset purchases.

BSS/AFP/MR/ 1236 hrs