No place for ECB risk reticence in Brexit deadlock
NEXT CHANCE FOR POLICYMAKERS TO ADDRESS IT IS AT ECB MEETING ON OCTOBER 24-25
The European Central Bank’s (ECB) prospects for gradually weaning the economy off monetary support could yet be tested by a big unknown its officials don’t mention much: a disorderly Brexit.
Policymakers have given limited prominence to that risk, despite divorce talks between the UK and European Union repeatedly stalling before the country’s departure in less than six months. In the economic analysis ECB President Mario Draghi reads out at every decision, it was last specifically cited in 2016, and his executive board colleagues haven’t referred to it often this year.
That reticence may be getting harder to sustain as the political standoff stokes increased speculation over the region’s outlook. The next chance for policymakers to address it is at their meeting on October 2425, when they’ll review their plan to conclude bond purchases this year and set up a possible rate hike in late 2019.
“Brexit is the big elephant in the room for the euro area’s economy,” said Karsten Junius, chief economist at Bank J Safra Sarasin in Zurich. “A lot of people are trying to guess the nittygritty of interest-rate increases that are still about a year out, but are ignoring one of the region’s key economic risks.”
The ECB could conceivably disagree. The main growth ■ risks it specifically cited in September were rising protectionism, emerging market vulnerabilities, and financial market volatility.
Muted impact
Draghi has spoken on the topic, he’s tended to play down the economic risks. Questioned by EU lawmakers in September on the implications of a no-deal Brexit, he said ECB estimates show the impact “should be, in the aggregate, quite muted.”
In a statement for the International Monetary Fund (IMF) meeting in Bali this month, he said a disorderly outcome could pose a “significant downside risk” to financial stability but the overall risk should be limited.
He told EU leaders at last week’s summit in Brussels — where Brexit talks again failed to achieve a breakthrough — that the direct effects would be limited for the euro area.
ECB has good reason to shun the matter as long as possible. It may wish to avoid raising the alarm over a hypothetical worst-case scenario that could even incite public debate.
A euro-zone central bank official, speaking anonymously, said a failure to reach a Brexit deal could necessitate a downward revision of ECB forecasts and slow the normalisation of monetary policy.