6-month extension expected for eurozone stimulus
FRANKFURT, Germany — Faced with weak growth and inflation across the 19-country eurozone, the European Central Bank is expected to extend its stimulus program for at least six months when it concludes its policy meeting today.
Last month’s victory by Donald Trump in the U.S. election and the uncertainty generated by the recent Italian referendum, which prompted Premier Matteo Renzi to offer his resignation, will make the decision all the more straightforward, analysts say.
Though Trump’s victory has helped revitalize stock markets, there are concerns that his approach to trade may hurt global growth.
And Renzi’s hefty defeat in the vote on constitutional changes he hoped would streamline decision-making in Italy has piled pressure on Italian banks, with the third-largest, Monte dei Paschi di Siena, scrambling to secure money to plug a black hole.
A decision to not extend the central bank’s stimulus program — in which it buys $86 billion in bonds a month — past the current March deadline could worsen concerns about Italy, an economy that’s barely grown for years.
“The fallout from a Trump presidency on global growth and the impact of the Italian referendum on the banking system has increased the risks around the growth outlook,” said Ben May, lead eurozone economist at Oxford Economics.
As a result, May said, the central bank likely will take a “cautious response” to handling the expiration of its stimulus efforts.
European Central Bank President Mario Draghi has already indicated that the bank’s future stance will be clarified today, when it will have compiled new inflation and growth forecasts.
A decision to extend the stimulus program is facilitated somewhat by a global rise in bond yields after Trump’s victory that makes more bonds available for the central bank to purchase.
Analysts said an extension from the stimulus program’s March deadline could be accompanied by an explanation on how the bank ends it. Many expect the bank to start tapering off the purchases after the anticipated six-month extension to avoid a cliff-edge end to the program that could jolt markets.
The main aim of the central bank’s government and corporate bond purchases is to keep market borrowing rates low to promote lending, which in turn stoke inflation and, ultimately, growth.
The evidence of success is mixed.
At 0.3 percent in the third quarter of the year, the eurozone’s economic growth is still anemic. Unemployment, however, is falling consistently across the eurozone, especially in Spain and Greece, two economies battered by the region’s recent debt crisis.
There are also signs that the stimulus is nudging up inflation, though the rise in oil prices over the past year has been the main factor. In the year to November, consumer prices across the eurozone rose by 0.6 percent. Though still way below the central bank’s target of just below 2 percent, November’s annual rate was the highest in 2½ years.
“We firmly believe that the [European Central Bank] will come out on the side of ‘supporting the economy’ in order to achieve their main inflation target,” analysts at RBC Capital Markets said in a note.