ECB’s Draghi to tip­toe to stim­u­lus exit

Kuwait Times - - BUSINESS -

Euro­pean Cen­tral Bank head Mario Draghi is likely to tread softly to­mor­row as the bank inches to­ward bring­ing an end to its mon­e­tary stim­u­lus ef­forts.

An­a­lysts think it’s a near-cer­tainty that the ECB, the mon­e­tary author­ity for the Euro­pean Union’s 19-coun­try euro cur­rency union, will start scal­ing back its 60 bil­lion eu­ros ($69 bil­lion) in monthly bond pur­chases af­ter their ear­li­est ter­mi­na­tion date at the end of the year.

But they don’t ex­pect Draghi to pro­vide the road map for the exit at to­mor­row’s news con­fer­ence, which will fol­low the reg­u­lar meet­ing of the bank’s 25-mem­ber gov­ern­ing coun­cil at the bank’s Frank­furt sky­scraper head­quar­ters. The bank is ex­pected to leave its in­ter­est bench­mark un­changed at zero. More clar­ity on the tim­ing of the stim­u­lus with­drawal is ex­pected at the Sept. 7 meet­ing.

The rea­son why lit­tle is ex­pected right now: Draghi and top bank of­fi­cials want to avoid a sud­den mar­ket re­ac­tion that could pre­ma­turely send busi­ness and gov­ern­ment bor­row­ing costs higher be­fore the phase-out starts. The cau­tion may be un­der­stand­able given the re­ac­tion to Draghi’s speech on June 27 in Sin­tra, Por­tu­gal, where he talked about the “strength­en­ing and broad­en­ing” eu­ro­zone re­cov­ery but sig­naled no def­i­nite shift in the bank’s stance.

Mar­kets re­acted sharply any­way, help­ing to send the euro higher - it’s re­cently pushed above $1.15 for the first time since May 2016 - and bond prices lower. The sud­den moves sug­gested that some mar­ket par­tic­i­pants were still un­pre­pared for an end to the stim­u­lus, which the bank says has played a big role in shor­ing up the eco­nomic re­cov­ery in the eu­ro­zone by keep­ing a lid on mar­ket in­ter­est rates.

The mar­ket re­ac­tion echoed the so-called “ta­per tantrum” that fol­lowed re­marks by then US Fed­eral Re­serve head Ben Ber­nanke in May, 2013. US gov­ern­ment bonds prices sagged af­ter Ber­nanke in­di­cated that the eco­nomic re­cov­ery would mean the Fed could ta­per off its own bond-pur­chase stim­u­lus.

That pro­gram has since been ended and the Fed has started rais­ing in­ter­est rates. Draghi is ex­pected to un­der­line the need for cau­tion in with­draw­ing the stim­u­lus, even while point­ing out the eu­ro­zone’s strength­en­ing re­cov­ery. A raft of in­di­ca­tors in re­cent months has raised ex­pec­ta­tions that the eu­ro­zone re­cov­ery has gained mo­men­tum and that growth will come in stronger than an­tic­i­pated. Many econ­o­mists are pre­dict­ing that growth will be north of 2 per­cent this year.

In­fla­tion re­mains the main prob­lem con­fronting the ECB. The pri­mary pur­pose of the bank’s stim­u­lus ef­forts is to get in­fla­tion up to its goal of just un­der 2 per­cent. In the year to June, it was only 1.3 per­cent.

“We ex­pect Draghi to re­fer to the need for ‘pa­tience’ and ‘pru­dence’ as well as the need for ‘per­sis­tent’ mon­e­tary pol­icy sup­port in a bid to sig­nal that nor­mal­iza­tion will be grad­ual,” Ben May, lead eu­ro­zone econ­o­mist at Ox­ford Eco­nom­ics, said.

He added that the ECB “is un­likely to pro­vide any firm guid­ance” on what will hap­pen to the bond pur­chases next year. Mar­ket watch­ers will fo­cus on the bank’s stand­ing prom­ise that it could in­crease the pur­chases in size or du­ra­tion if the out­look wors­ens. Drop­ping that prom­ise from the post-meet­ing state­ment would be a small move to­ward announcing a phase-out of the stim­u­lus. Sev­eral an­a­lysts how­ever think Draghi won’t go even that far.

The ECB’s bond pur­chases be­gan in March, 2015 in an ef­fort to raise in­fla­tion and avoid a crippling down­ward price spi­ral. The ECB pur­chases the bonds with newly cre­ated money, push­ing that new money into the fi­nan­cial sys­tem and the econ­omy. Print­ing money can in the­ory cause higher in­fla­tion, but prices have re­sponded only slowly.

An­a­lysts think the ECB will have to end the pro­gram by the end of next year in any case be­cause it will run out of avail­able bonds to pur­chase. The bank has re­stricted it­self to pur­chas­ing no more than a third of the bonds is­sued by any coun­try. That is to avoid charges that it is dom­i­nat­ing the mar­ket for that coun­try’s debt and prop­ping up gov­ern­ment fi­nances, some­thing it is legally re­stricted from do­ing. —AP

FRANK­FURT: In this April 21, 2016 file photo pres­i­dent of Euro­pean Cen­tral Bank, ECB, Mario Draghi speaks dur­ing a news con­fer­ence af­ter a meet­ing of the gov­ern­ing coun­cil in Frank­furt. Draghi said yes­ter­day the bank’s stim­u­lus ef­forts need to be “per­sis­tent” even as the econ­omy re­cov­ers.—AP

Newspapers in English

Newspapers from Kuwait

© PressReader. All rights reserved.