Po­lit­i­cal risk could prompt more ECB ac­tion: An­a­lyst

Kuwait Times - - BUSINESS -

The Euro­pean Cen­tral Bank will of­fer fur­ther sup­port tomorrow to a still-frag­ile eu­ro­zone re­cov­ery, an­a­lysts said, against a back­ground of un­cer­tainty over US Pres­i­dent-elect Don­ald Trump, Brexit and po­lit­i­cal risks in Europe. Ital­ians’ re­jec­tion of con­sti­tu­tional re­forms in a Sunday ref­er­en­dum did not roil mar­kets as some ob­servers had feared, but means that worries over one of Europe’s weak spots will be pro­longed-and will likely push the ECB to main­tain its mass bond-buy­ing pro­gram at this week’s meet­ing.

“We don’t have in­creased mar­ket un­cer­tainty, but we have po­lit­i­cal un­cer­tainty,” ING Diba bank economist Carsten Brzeski told AFP. Growth and in­fla­tion re­main on a slow up­ward path across the 19-na­tion eu­ro­zone, he pointed out. But doubts about Italy’s abil­ity to over­haul its econ­omy and fears of anti-euro pop­ulists mak­ing gains in the next par­lia­men­tary elec­tions will join other con­cerns dog­ging pol­i­cy­mak­ers as they gather in Frank­furt for the last gov­ern­ing coun­cil meet­ing of 2016.“Geopo­lit­i­cal un­cer­tainty has be­come the ma­jor source of un­cer­tainty for the months to come,” cen­tral bank pres­i­dent Mario Draghi warned MEPs in Brussels last week.

In the US, Trump’s bom­bas­tic Twit­ter sal­lies on trade and re­la­tions with China have rat­tled ob­servers in re­cent days. Bri­tain’s ob­jec­tives for a deal with the EU af­ter its June vote to quit the bloc re­main opaque.

And 2017 will bring elec­tions in heavy­weight eu­ro­zone mem­bers France and Ger­many over­shad­owed by swelling pop­ulist forces. “So much un­cer­tainty will be used by the ECB to ex­tend quan­ti­ta­tive eas­ing,” Brzeski said, re­fer­ring to the bank’s mas­sive bond-buy­ing pro­gram. “The Ital­ian ref­er­en­dum is just a small part of it.”

Re­liant on ECB

A mam­moth pack­age of un­con­ven­tional mon­e­tary pol­icy launched by the ECB in March pushed in­fla­tion in the eu­ro­zone to 0.6 per­cent by Novem­ber-the high­est level since April 2014 but still far short of the bank’s tar­get of just be­low 2.0 per­cent.

Pol­i­cy­mak­ers in­sist that its cheap loans to banks, ul­tralow in­ter­est rates and 80-bil­lion-euro ($85 bil­lion) monthly bond pur­chases have stim­u­lated growth and in­fla­tion.

But Draghi last month ac­knowl­edged that what growth there is re­mains “highly re­liant” on ECB sup­port. Jumpy mar­ket re­ac­tions to a Bloomberg News re­port in Oc­to­ber that the bank might be­gin “ta­per­ing”, or wind­ing down, QE mean the ECB is un­likely to broach the pos­si­bil­ity on Thurs­day, Natixis bank economist Jo­hannes Gareis told AFP. He ex­pects Draghi to ex­tend the as­set-pur­chas­ing pro­gramme at the same rate for a fur­ther six months. “The bond mar­kets are ex­tremely ner­vous,” ING Diba’s Brzeski agreed. Hint­ing at ta­per­ing “runs the risk that this leads to an­other sell-off and that in­ter­est rates go up,” throt­tling the eco­nomic re­cov­ery by mak­ing ac­cess to credit more dif­fi­cult, he said.

The next move

Be­yond ex­tend­ing quan­ti­ta­tive eas­ing, the ECB may ad­just its self-im­posed rules about the bonds it is al­lowed to buy. Feared short­ages of el­i­gi­ble bonds have yet to bite, but chang­ing the pa­ram­e­ters “would stress the ECB’s abil­ity to act”, Gareis said. Cur­rently, the ECB can­not buy more than 33 per­cent of any is­suer’s bonds, can­not buy bonds with a yield be­low the in­ter­est rate banks pay on de­posits (cur­rently -0.4 per­cent), and must buy bonds in pro­por­tion to a coun­try’s share of the eu­ro­zone’s gross do­mes­tic prod­uct. —AFP

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