FRANKFURT: Mounting positive signals from the economy won’t put the European Central Bank off massive monetary stimulus Thursday, analysts predict, with policymakers preferring to wait for calmer political waters and fresh data before acting.
Faced with continuing political uncertainty and weak inflation, policymakers are unlikely to turn off the taps on mass bond-buying or raise interest rates from historic lows, fearing that doing so would risk nipping the eurozone economic recovery in the bud.
The bank’s interventions are designed to encourage banks to lend to the real economy, powering growth and pushing inflation towards its target of just below 2.0 percent.
But while price growth in the 19-nation single currency area briefly overshot the goal in February, it fell back to 1.5 percent in March.
Meanwhile, policymakers are anxious not to upset financial markets while eurozone heavyweight France navigates a high-stakes presidential election, which far-right anti-euro candidate Marine Le Pen has a real chance of winning despite trailing in the polls as the run-off approaches.
“Economic activity in the eurozone is firming according to survey data, and the Frexit risk has backed down,” commented Natixis bank economist Alan Lemangnen.
“Still, we expect [ECB president Mario Draghi] to recall that conditions for a durable adjustment of inflation are not gathered yet.”
Draghi last week reiterated his conviction that “very substantial” support from the central bank is still needed to bring core, or underlying inflation—excluding volatile food and energy prices —back towards the target.
“Underlying inflation . . . is expected to rise only gradually over the medium term,” he told the International Monetary and Financial Committee in Washington.
Draghi and his supporters on the governing council see slack remaining in the economy.
The ECB chief in March labelled higher wages the “lynchpin” of increased inflation, but high unemployment in some member countries means employers still don’t need to offer pay rises, as workers bargain from a weak position.
While expectations are subdued, observers will be watching closely for any hint that the ECB may begin “tapering” or winding down its bond purchases, which it decided in December to reduce from 80 billion euros ($87 billion) per month to 60 billion from April.
Since then, economic data have painted a positive picture of the eurozone, suggesting the way could soon be clear for the bank to further reduce its interventions in financial markets.
Around the ECB conference table, some have been calling for an end to bond-buying and a rise in the deposit rate of interest, currently at -0.4 percent—meaning banks have to pay to park their cash with the central bank.
Draghi and his allies have long argued that political and economic risks within and outside the eurozone justify continuing support to the economy, but even some close to the president now allow that the outlook is more balanced.
The discord has pricked up the ears of financial markets, hungry for any hint about the governing council’s plans for the future of the easing programme.
One tiny change in language in Draghi’s statement following the March meeting prompted speculation about whether the ECB might raise the deposit rate before the end of its bond-buying, currently slated for December.
This month, Draghi and his lieutenants used public appearances to try to let the air out of the excitement.
The best ECB watchers can hope for on Thursday is “hinting at a positive rebalancing of risks… leaning towards a less dovish and more neutral stance,” Natixis’ Lemangen predicted.
“Any slight upgrade in the assessment on growth could be seen as a harbinger of changes . . . in the June meeting,” ING analysts commented in a research note.
When policymakers next meet on June 8, the landscape they survey could look very different.
Centrist, pro-EU candidate Emmanuel Macron is expected to beat Le Pen in the run-off vote for the French presidency, shutting down a major source of uncertainty within the eurozone’s borders.
Meanwhile, the governing council will get its hands on the latest forecasts from ECB staff, likely to show a healthier economic outlook and offer fresh ammunition to the “hawks” calling for a decision to wind down bond-buying ahead of the programme’s December cut-off point.