ECB poised for action as politics rattle eurozone

Most analysts predict president Mario Draghi will extend an 80-billion-euro ($86-billion) per month bond-buying scheme beyond the current March deadline at his press conference.

ECB poised for action as politics rattle eurozone

World Bulletin / News Desk

The European Central Bank is widely expected to prolong massive monetary stimulus Thursday as the election of Donald Trump and fears for heavyweight member Italy rattle the eurozone.

Along with cheap loans to banks and record-low interest rates, ECB policymakers see the quantitative easing programme as critical to supporting a sluggish recovery and pushing up inflation in the eurozone.

But while euro area inflation hit a two-and-a-half-year high in November at 0.6 percent, it remains far short of the central bank's target of just below 2.0 percent.

Meanwhile, economic activity in the eurozone could suffer if US President-elect Donald Trump implements protectionist promises made on the campaign trail.

And the 28-country European Union has worries of its own, with Britain headed for the exit door, Italy destabilised by the resignation of Prime Minister Matteo Renzi, and elections in the key eurozone economies of France and Germany next year.

"Among elevated political risks with potential financial implications... the ECB will want to tread carefully," analyst Holger Schmieding of Berenberg Bank wrote.

Against this background, the ECB is unlikely to begin "tapering" (winding down) its asset purchases just yet, he argued, preferring to keep them going for at least a few more months.

- Growing pressure -
Extending QE on Thursday may be the last hurrah for the expansionary monetary policy that has marked Draghi's term in office.

Some ECB policymakers have hinted that with forecasts showing inflation rising steadily into 2018 it is time the stimulus was withdrawn.

"How long a chosen monetary policy course is held must exclusively be determined by what's necessary to ensure price stability," Jens Weidmann, head of Germany's Bundesbank (central bank) and ECB board member said in Munich on Monday.

Banks regularly grumble that low interest rates are hurting their business, and influential German economists have repeated calls in recent weeks for the ECB to end its bond-buying.

Draghi has so far resisted any such talk, insisting after October's council meeting that tapering had not even been discussed.

A Bloomberg News report that QE might be on the way out troubled bond markets in early October.

This time around, Draghi may "drop a somewhat clearer hint than before that tapering may start" once any extension has run its course, Berenberg's Schmieding said.

ECB leaders "are not stupid, they have started to notice that there are adverse effects from their monetary policy," economist Carsten Brzeski of ING-Diba bank told AFP.

- Financial tightening -
ECB monetary policy is designed to make access to credit easier for businesses and consumers, powering a recovery with investment and consumption.

Cutting off that support could halt the eurozone's return to stable growth in its tracks by curtailing access to credit, the ECB fears.

That sense is likely to be all the stronger faced with the uncertainty that has sprung to the fore over the course of 2016.

"For the time being, they are really convinced that monetary policy is the driver of the recovery," ING-Diba's Brzeski said.

Even hinting at tapering might spook bond markets, causing a sell-off that would ultimately drive up the cost of financing in the real economy and undermine what progress the ECB has made so far, he went on.

The ECB will "avoid discussion of tapering scenarios," Natixis bank economist Johannes Gareis told AFP.

"There is no potential cost to avoiding a tapering discussion at the December meeting, while the potential cost to starting it too early is not negligible."

Instead, the ECB will likely loosen its self-imposed rules on which bonds are eligible for the purchase programme, he said, as a signal to markets that it will maintain its monetary policy for as long as necessary.

Güncelleme Tarihi: 08 Aralık 2016, 11:41