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ECB is set to remove key support pillar
Policymakers at the European Central Bank will remove a key pillar of their support for the eurozone economy as planned tomorrow, even while offering a gloomier outlook for the coming years, analysts expect.
But with financial markets in turmoil over risks in Europe and beyond — from Brexit to an Italian budget row and Donald Trump’s trade showdown with China — the Frankfurt institution will be at pains to strike a reassuring tone.
After more than three years and purchases of €2.6tn ($3.0tn) of government and corporate bonds, the ECB should announce as planned the end of its “quantitative easing” (QE) programme, after months of step-wise winding-down.
Designed to pump cash through the financial system and into the real economy, central bank chiefs say the scheme has stoked growth and set the eurozone on a path towards inflation at their target pace of close to, but below 2.0%.
The 19-nation single currency area saw unexpectedly powerful growth in 2017, but expansion has since fallen back, dropping to just 0.2% between July and September.
Speaking to European lawmakers last month, ECB president Mario Draghi said the sharp third-quarter slowdown was largely due to one-off factors, such as a bottleneck for the car industry from new EU missions tests.
And regardless of risks to growth, “the underlying strength of domestic demand and wages continues to support our confidence” in inflation rising to target, he added. “That confidence means come Thursday, ‘it’s the end of QE as we know it and we will be fine’,” predicted ING Diba bank economist Carsten Brzeski.
Even after the end of QE, “let’s not forget that there is still a reinvestment programme in place,” he added.
The ECB will stay active in debt markets by reinvesting the proceeds from its massive stock of bonds as they mature — holding down borrowing costs for governments and firms for longer.
And it is expected to keep interest rates at historic lows “at least through the summer” of next year as a further spur to activity.
Draghi should play up such continued support for the eurozone as he presents what are widely expected to be lower forecasts for growth in 2018 to 2020, as well as offering the first glimpse of the ECB’s expectations for 2021.
The inflation outlook should be mostly unchanged from the last round in September, calling for 1.7% price growth each year between now and 2020. But “the staff is likely to revise down its growth forecast for this, and, in particular, next year,” Natixis bank analyst Dirk Schumacher said.
“We expect the staff projections to clearly acknowledge the weakening in the data, but still provide the governing council with enough room to argue that an end of net purchases is justified,” he added.
Meanwhile, there are some grounds for Draghi to be optimistic about the persistent risks threatening the euro- zone economy from within and without.
After meeting at the G20, Trump and Chinese President Xi Jinping agreed to hold off from escalating their trade confrontation for 90 days of talks, easing fears of further knock-on effects for Europe.
The Italian government has promised to review the deficit-boosting draft budget that put it on a collision course with Brussels and sent its borrowing costs surging.
Regarding Brexit, British Prime Minister Theresa May has secured an agreement with Brussels on the UK’s imminent departure.
However, lawmakers in London may yet withhold their rubber stamp and yesterday saw May say she was deferring a parliamentary vote on her deal after conceding it would be rejected.
May said she would first seek “assurances” from other European leaders ahead of an EU summit later this week.