All eyes on ECB’s stim­u­lus plans

The Myanmar Times - - International Business -

EURO­PEAN Cen­tral Bank chief Mario Draghi will be un­der pres­sure this week to clar­ify the bank’s stim­u­lus plans af­ter in­vestors were spooked by talk of an end to its mas­sive bond­buy­ing pro­gram.

The ECB gov­ern­ing coun­cil is not ex­pected to make any changes to its ul­tra-loose mon­e­tary pol­icy at its meet­ing on Oc­to­ber 20, keep­ing in­ter­est rates at record lows.

But an­a­lysts will be lis­ten­ing for clues about the fu­ture of the bank’s monthly 80 bil­lion euro (US$88 bil­lion) as­set buy­ing scheme, af­ter a re­port said pol­i­cy­mak­ers were con­sid­er­ing “ta­per­ing” – or grad­u­ally phas­ing out – the pro­gram.

The ECB strongly de­nied the spec­u­la­tion but mar­kets were rat­tled nonethe­less, spark­ing a sell-off that pushed down bond prices in what more san­guine com­men­ta­tors dubbed a “ta­per tantrum”.

Far from wind­ing it down, most an­a­lysts ex­pect the cen­tral bank to ex­tend the so-called “quan­ti­ta­tive eas­ing” (QE) pro­gram, which aims to en­cour­age spend­ing by pump­ing money into the econ­omy, and is cur­rently due to ex­pire in March.

De­spite some pos­i­tive sig­nals in re­cent months, eu­ro­zone growth has re­mained slug­gish and in­fla­tion stub­bornly low, sug­gest­ing more, not less, stim­u­lus is needed.

“There are some good rea­sons to be­lieve that the ECB’s work is not yet done,” said Jonathan Loynes of Cap­i­tal Eco­nom­ics.

“Most ob­vi­ously, while growth has sta­bilised, it is still distinctly lack­lus­tre.”

The ECB it­self has re­peat­edly in­di­cated that it is ready “if nec­es­sary” to con­tinue with the cor­po­rate and gov­ern­ment bond pur­chases beyond the March dead­line.

But in­vestors ap­pear wor­ried the euro-zone cen­tral bank could run out of eli­gi­ble bonds to buy un­der its own self-im­posed re­stric­tions.

In a nod to those con­cerns, Mr Draghi last month said he had asked staff to look at pos­si­bly tweak­ing some of those rules.

At its last meet­ing in Septem­ber, the ECB again held its mon­e­tary pol­icy fire and pleaded for pa­tience to give its rem­edy of low in­ter­est rates, cheap loans to banks and the huge in­jec­tion of liq­uid­ity a chance to work.

In a sign that the un­prece­dented stim­u­lus may be de­liv­er­ing, con­sumer prices rose to a near two-year high in the 19-coun­try euro area in Septem­ber.

At 0.4 per­cent, how­ever, in­fla­tion is still far be­low the ECB’s tar­get of just un­der 2pc.

The ECB said in its most re­cent fore­cast that it ex­pects in­fla­tion to reach 1.6pc by 2018 as the stim­u­lus ef­forts pay off.

Most an­a­lysts be­lieve the bank will hold off on an­nounc­ing any fresh mon­e­tary sup­port un­til a key meet­ing on De­cem­ber 8, when it will un­veil its lat­est growth and in­fla­tion pro­jec­tions for the euro area which help guide its de­ci­sions. –

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