Political risk could prompt more ECB action: Analyst

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