ECB expected to bide time after Brexit shock

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FRANKFURT: The European Central Bank (ECB) is not expected to announce any new measures at its regular policy meeting on Thursday, but could flag fresh stimulus in September as the real economic fallout from Brexit makes itself felt, analysts said.

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With no more rate cuts or other policy measures on the cards just yet, investor attention will focus on what ECB chief Mario Draghi has to say about the possible repercussions for the euro area from Britain’s shock vote to quit the European Union, ECB watchers said.

“By the time the governing council meets, it will only have very limited information on the short-term impact of Brexit” said UniCredit economist Marco Valli.

Initial financial market turmoil has subsided in the weeks following the referendum.
But economists and analysts are concerned about the real economic consequences, which are only beginning to materialize and will show up in official statistics weeks or months later.

In Germany, Europe’s biggest economy, a closely watched investor sentiment survey conducted by the ZEW think tank, plummeted to its lowest level in nearly four years in reaction to the Brexit vote.

The ZEW data “will be some cause for concern, supporting our view that Draghi . . . will take a dovish tone” at his regular post-meeting news conference, said Berenberg Bank economist Florian Hense.

Over the past few years, the ECB has rolled out a raft of different measures to help get the eurozone economy back on its feet.

Beginning to work
It has slashed interest rates to all-time lows, pumped vast amounts of liquidity into the financial system via cheap loan schemes to banks, and embarked on an asset purchase program of up to 80 billion euros ($88 billion) per month to try and drive up chronically low inflation in the single currency area.

Eurozone inflation stood at a mere 0.1 percent in June, a long way below the level of just under 2.0 percent that the ECB regards is conducive to healthy economic growth.
But there are signs that the ECB measures are beginning to work.

In its latest quarterly bank lending survey, the ECB found that banks are easing credit standards for loans to companies, an encouraging sign, since the chronic weakness of credit activity in the euro area has previously been blamed for the absence of any noticeable recovery.

Furthermore, demand for loans is also increasing, the survey showed.

While Britain is not a member of the euro area, it is a vital trading partner for European countries and it will have to redefine its relations with the bloc in terms of the movement of goods, services, capital and people.

The seismic effect of Brexit could also deal a heavy blow to the stability of Europe’s financial system.

Newly installed British Prime Minister Theresa May is visiting Berlin and Paris this week to sound out Germany’s Chancellor Angela Merkel and French President Francois Hollande on the upcoming negotiations.

More action needed
European leaders have insisted that there will be no formal talks before Britain triggers Article 50 of the Lisbon Treaty, setting a two-year countdown clock ticking towards its final departure.

That political limbo could leave ECB president Mario Draghi striving to shore up eurozone growth alone as government leaders wrangle.

“The bank may not act this week,” wrote analysts at Capital Economics, “but it needs to do more to boost growth and inflation very soon.”

“Draghi will want to convince markets that he has enough arrows remaining in his quiver to take further action,” agreed Franck Dixmier at Allianz.

By the September meeting, though, the governing council will be armed with more hard data and quarterly forecasts from the ECB staff to inform their policy moves.

“The mix of weaker growth, slightly lower inflation and increased risks to financial stability will probably convince the governing council to extend QE for six months until at least September 2017,” Unicredit’s Valli suggested.

AFP

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