ECB to play down Italy chaos and trade war fears

FRANKFURT AM MAIN: Fears of a transatlantic trade war and political deadlock in Italy will not cloud European Central Bank optimism yesterday, analysts predict, but policymakers will remain tight-lipped about plans for winding down their massive support to the economy.

Markets have this week nervously eyed a populist surge in the eurozone’s third economy and barbs flung between Washington and Brussels.

ECB President Mario Draghi is unlikely to rock the boat further with talk of higher interest rates or cuts to the bank’s “quantitative easing” bond-buying programme.

Observers see the ECB on the way out of its mass bond-buying scheme, after it halved purchases of government and corporate debt to some 30 billion euros (US$37 billion) per month from January this year.

Along with historic low interest rates, bond-buying was designed to stoke economic growth by pumping cash through the financial system, helping boost inflation to the ECB’s target of just below 2.0 per cent – seen as most favourable for long-term growth.

But while GDP expansion in the 19-nation single currency area surged to 2.3 per cent last year, price growth has not picked up in step.

In December, ECB forecasts called for inflation to hit 1.7 per cent by 2020 – still slightly short of its goal.

Indicators like business confidence, unemployment and credit growth “have been consistent with the ECB’s positive assessment” for expansion of 2.3 per cent this year and 1.9 per cent in 2019, economist Frederik Ducrozet of Pictet bank noted.

Nevertheless, “notwithstanding the ECB’s rising confidence, the staff projections for inflation are likely to remain stable in March,” Ducrozet added.

Steady forecasts will not quell discord on the ECB’s 25-strong governing council, made up of the executive board and governors from the 19 member states’ central banks.

Minutes from January’s meeting showed policymakers who favour dismantling bond-buying faster in light of stronger growth are increasingly vocal.

They were boosted last month when board member Benoit Coeure judged that “in future, the eurosystem (of the ECB plus the national central banks) can retreat as a buyer” without unravelling easier financing conditions.

“The end of QE is getting closer. The risk of deflation is clearly behind us and the only question is how to moderate and implement this exit,” analyst Carsten Brzeski of ING Diba bank said.

But so-called “hawks” remain outvoted by “doves”: governors who think the ECB should keep fuelling the recovery until it is certain of reaching its inflation goal. — AFP