ECB seeks balance to keep low-inflation recovery on rails

FRANKFURT AM MAIN: European Central Bank president Mario Draghi will paper over discord among colleagues at a press conference Thursday, analysts predict, with policymakers divided on their response to heftier economic growth unaccompanied by higher inflation.

Top central bankers know the end is in sight for massive support to the 19-nation eurozone.

But the ECB’s governing council meeting in Frankfurt will bring another round in the battle over how quickly to wind down mass bond-buying and ultimately raise interest rates.

Meanwhile, financial markets are on alert for the slightest change in the bank’s stance, after minutes from December’s meeting showed governors plan to “revisit” policy early this year.

The ECB has bought almost 2.3 trillion euros (US$2.8 trillion) of government and corporate bonds, offered cheap loans to banks and set interest rates at historic lows, aiming to stoke eurozone growth and boost inflation towards its target of just below 2.0 per cent.

Like other central banks worldwide it has puzzled as higher economic growth – estimated at 2.4 per cent in 2017 – and reduced unemployment have not brought faster price increases.

Euro area inflation fell to just 1.4 per cent in December, well short of the ECB target, and is seen climbing only to 1.7 per cent by 2020 in forecasts.

“While the strength of the economy suggests that extraordinary policy support is becoming unnecessary, the inflation outlook does not seem to warrant policy tightening,” analyst Jennifer McKeown of Capital Economics summed up.

Some ECB chiefs argued at December’s meeting that “a policy stance that remained in crisis configuration” was no longer needed, according to minutes of the discussion.

Policymakers decided in October to cut bond-buying by half to 30 billion euros per month and set a time limit of September.

“We can be hopeful that the October extension was the last one,” ECB executive board member Benoit Coeure told German business daily Handelsblatt in November.

Council members in favour of a prolonged, gentle exit from bond-buying are fighting a rearguard action against more aggressive ‘hawks’, as the bank approaches technical limits to bond-buying that could open it to legal challenge. — AFP