BCN-01,02 ECB to scale back crisis measures despite tense outlook: analysts

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ECB to scale back crisis measures despite tense outlook: analysts

FRANKFURT AM MAIN, Sept 13, 2018 (BSS/AFP) – The European Central Bank
will not shirk from scaling back its crisis-fighting stimulus Thursday,
analysts expect, even as trade tensions, emerging market woes and Italy
bucking budget rules shade the economic outlook.

An actual rise in interest rates, at historic lows since 2016, remains a
long way off for the Frankfurt-based institution, they predict.

But President Mario Draghi is unlikely to see risks to growth and
inflation in the 19-nation single currency area as big enough to warrant
slowing his exit from mass bond-buying.

So-called “quantitative easing” — designed to pump cash through the
financial system and into the real economy, powering growth and inflation —
is slated to fall from the present 30 billion to 15 billion euros ($17.4
billion) per month from October, before ending it in December.

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

Back then, Draghi proclaimed “confidence” in the outlook for growth and
inflation, saying risks “broadly balanced” between positive and negative were
not enough to knock off course the bank’s pursuit of stable price growth
close to but below 2.0 percent.

“The fundamental backdrop clearly speaks for the ECB exiting its ultra-
loose monetary policies,” UBS analysts commented, pointing to relatively
steady growth in the eurozone and rising wages likely to stoke prices towards
the target.

Nevertheless, “the balance of risks has become more unfavourable in recent
months,” the bankers added.

– Growing risks –

Draghi in the summer highlighted the danger of trade friction between the
United States and 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.
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And within the euro area, governments and financial markets fear Italian
ministers will honour pricey electoral promises rather than shrinking Rome’s
tottering debt pile of 132 percent of annual gross domestic product — more
than twice the EU target.

Despite official reassurances, the so-called “yield spread” — which
measures the difference in perceived risk between Italian and ultra-safe
German government bonds — remains uncomfortably high.

Neither is macroeconomic data all rosy.

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.

– ‘Patient, persistent, prudent’ –

“With growth still ‘good’ for now, and given signs that core inflation
should rise, (Draghi) is unlikely to suggest that the Council is about to
reconsider its strategy,” Capital Economics analyst Jennifer McKeown
predicted.

But he will “stress the Bank’s flexibility and indicate that it is not
wedded to ending asset purchases this year or to raising interest rates after
next summer,” she added.

“The risks of a later hike, or indeed no hike at all, have risen.”

Financial players will also be looking out for hints about how the central
bank will reinvest the proceeds as the 2.5-trillion-euro stock of corporate
and government bonds it has amassed since 2015 matures.

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

The ECB’s press conference will also bring new growth and inflation
forecasts from the central bank staff looking as far ahead as 2020, but no
major changes are expected — leaving the floor open for a re-run of Draghi’s
“patient, persistent, prudent” greatest hits.

BSS/AFP/HR/0905