ECB to stand fast as squeeze on bond-buying nears
FRANKFURT AM MAIN: The European Central bank will drop hints and play for time at its meeting Thursday, analysts predict, saving a big announcement on ending its easy-money policy for October as it strives to balance conflicting pressures.
Two major factors are squeezing the ECB: a stronger euro and still-sluggish inflation could justify prolonging its quantitative easing ( QE) bond- buying programme, but it is approaching the legal limits of the scheme and may be forced to wind it down.
“ECB President (Mario) Draghi for the first time ought to hint at a reduction of the central bank’s bond purchases in 2018” on Thursday, Commerzbank chief economist Joerg Kraemer said.
After the last meeting, Draghi was deliberately vague about the date when a concrete decision would fall, promising an update in the ‘autumn’ – which most analysts have taken to mean September or October.
Along with low interest rates and cheap loans to banks, the ECB’s 60 billion euros (US$71.5 billion) of bond purchases per month are designed to encourage growth in the 19-nation eurozone, pushing inflation towards its target of just below 2.0 per cent.
The appreciation of the single currency since the ECB’s last meeting has strengthened the case to delay the formal announcement of tapering until October. Jennifer McKeown, Capital Economics analyst
Data that will feed into the ECB staff’s September forecasts for the coming years have yet to show price growth on track.
The projections will reflect the accelerating economic growth of 0.6 per cent seen in the single currency area between April and June.
But August figures from statistics agency Eurostat showed inflation at 1.5 per cent, well short of the central bank’s goal.
Meanwhile, the “core” measure highlighted by ECB policymakers, which excludes volatile food and energy prices, reached just 1.2 per cent.
One reason is that the euro has appreciated against other currencies as the recovery gathers pace, braking price growth as imports become cheaper.
“The appreciation of the single currency since the ECB’s last meeting has strengthened the case to delay the formal announcement of tapering until October,” Capital Economics analyst Jennifer McKeown said.
Nevertheless, “even at current levels, the euro should not do too much damage to the growth or inflation outlook,” she added.
Following July’s meeting of the governing council, Draghi emphasised the need to be “persistent and patient” in the face of unresponsive inflation, suggesting that an end to QE will be drawn out.
Policymakers still see slack in the eurozone economy, and have pointed to slow wage growth linked to still- high unemployment and underemployment in some member countries as the biggest factor holding back inflation. — AFP