ECB to hold firm through trade war and slowdown fears

FRANKFURT AM MAIN: Analysts expect the European Central Bank to leave unchanged plans to end massive stimulus for the eurozone by December, defying fears that a global trade war or domestic slowdown could sap the single currency area.

ECB President Mario Draghi may also dismiss accusations from US President Donald Trump that he is manipulating exchange rates to America’s disadvantage.

But with policymakers’ eyes on financial markets, “the main focus... will be on cementing the message from June” that the bank is withdrawing its support in response to the strength of the economy and its confidence it will eventually meet its inflation target, economist Carsten Brzeski of ING Diba bank predicted.

Draghi surprised observers last month by announcing he would slash monthly purchases of government and corporate bonds from 30 billion euros (US$35 billion) to 15 billion from October, before ending them at the end of the year.

Alongside ultra-low interest rates, bond-buying or quantitative easing (QE) was designed to pump cash through the financial system and into the real economy, stoking growth and in turn powering inflation towards the central bank’s 2.0 per cent price stability target.

After more than three years and some 2.4 trillion euros of QE, eurozone inflation hit 2.0 per cent in June after 1.9 per cent in May.

Such a one-off flirtation with its goal is unlikely to move the ECB from its plans to leave interest rates at their historic lows – the other pillar of its support to the economy – until at least summer next year.

Draghi has always been clear that the inflation target must be met “over the medium term”.

The latest ECB projections, though, see annual inflation hovering at 1.7 per cent between this year and 2020 – still short of the central bank’s aim for the foreseeable future.

Analysts point to ‘core’ inflation – excluding rapidly changing items like energy and food costs – of just 0.9 per cent in June as an indicator that will stay the ECB’s hand.

“The ECB still has a long way to go, to say the least,” Brzeski said.

Observers expect all the more caution from the ECB as the growth outlook for the eurozone has grown more uncertain.

Expansioninthesinglecurrency area slowed to just 0.4 per cent between January and March, although some indicators point to a rebound in the second quarter.

Meanwhile the first shots in a transatlantic trade war that risks further slowing growth have already been fired.

The EU hit a slew of American goods including jeans, peanut butter and motorcycles with tariffs in retaliation for US President Donald Trump’s June introduction of border taxes on steel and aluminium.

On Wednesday, European Commission President JeanClaude Juncker will visit the White House, hoping to talk Trump out of a new round of levies on car imports to America.