ECB to hunker down as eurozone outlook worsens

Business Tuesday 22/January/2019 14:03 PM
By: Times News Service
ECB to hunker down as eurozone outlook worsens

Frankfurt: Analysts expect the European Central Bank to acknowledge growing risks to the eurozone economy on Thursday while sticking to its patient course, kicking off a year that could see the Frankfurt institution mostly marking time.
The central bank is caught at an intermediate stage of withdrawing crisis-era stimulus, having wound up net purchases of government and corporate bonds — so-called "quantitative easing" (QE) — but seeing the economy still too fragile to lift interest rates from their historic lows.
Policymakers agreed in December to end QE after pumping a total of 2.6 trillion euros ($3 trillion) into the financial system.
The scheme aimed to power lending to the real economy of businesses and households, lifting economic growth and boosting inflation towards the ECB target of just below 2.0 per cent.
ECB president Mario Draghi said last month that QE had been "the crucial driver of recovery in the eurozone" since its introduction in 2015 — while insisting growth could continue after its withdrawal and blaming one-off factors for signs of weakening momentum.
Since then, new data "have done little to stop fears of a more prolonged slowdown," ING Diba bank economist Carsten Brzeski said.
"Confidence indicators are still plunging, hard data remains weak and latest Brexit developments suggest that new turbulence in both financial markets and the real economy is still on the horizon."
'Cool dude on high alert'
Weaker-than-expected economic growth will likely make for slower inflation than the 1.6 per cent the ECB forecasts for this year — an argument for the central bank to keep interest rates low beyond the current horizon of "through the summer of 2019".
"Markets are already looking further" into the future for the next rate hike, Bank of America Merrill Lynch economist Gilles Moec said.
"To create a shock (on markets) you would have to give a still further time horizon" sometime in 2020, he added — an extension likely to be resisted by "hawks" on the ECB's governing council.
If the ECB does draw out the wait for higher interest rates much beyond the summer, Draghi could end his term in October as the only president never to raise them.
Such records will be far from the Italian economist's mind this week, Brzeski said.
For now, the "right strategy" for the ECB is "being a cool dude who is on high alert rather than panicking into impulsive action," he added.
Draghi acknowledged to European Parliament lawmakers last week that the eurozone economy was falling short of expectations.
The single currency bloc is beset not only by Brexit but also growing trade protectionism, fragile emerging markets and domestic upsets like France's "yellow vests" protests.
That gloomier assessment could be reflected in the governing council's conclusions this week if they identify economic risks "tilted towards the downside" rather than "broadly balanced" as last month.
'Wishful thinking'
Ahead of the ECB meeting on Thursday, the eurozone's monthly purchasing managers' index (PMI) survey should show whether December's signs of slowdown have bedded in.
Governors will however likely brush off a drop-off in headline inflation, from 1.9 per cent in November to 1.6 per cent last month, as it was mostly caused by lower energy prices.
Ruling out such volatile elements, "core" inflation has stagnated at around 1.0 per cent, defying ECB predictions that rising levels of employment and wages should nudge prices upwards faster.
"The governing council's 'confidence' that inflation will converge with the target... increasingly looks like wishful thinking," said Capital Economics analyst Andrew Kenningham.
Rather than talking rate hikes, policymakers "may soon have to dust off past language hinting at further policy loosening," he added.
On Thursday, that could mean hints that the ECB is studying a new wave of low-interest loans to keep banks supplied with cash, followed by a concrete decision in the spring.