FRANKFURT AM MAIN: The European Central Bank will fend off calls to wind down its massive monetary stimulus when governors meet Thursday, preferring to wait for calmer political waters and fresh economic data, analysts predict.
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 in the economy are designed to power growth and push 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.
ECB president Mario Draghi on Friday 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.
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 after reaching the run-off.
“The meeting comes at a time at which the ECB would rather say nothing than give markets any new information to speculate about,” said economist Carsten Brzeski of ING Diba bank.
While expectations are subdued, observers will still 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 has supported the view of brightening economic prospects, slowly paving the way for a gentle exit from the current ultra-loose monetary policy,” Brzeski judged.
Around the conference table at the ECB’s Frankfurt headquarters, 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.
“Despite all the noise and misleading signals, we do not think that the ECB is anywhere close to reconsidering its view” that interest rates cannot rise before bond-buying is over, said Unicredit economist Marco Valli.
Rendezvous in June
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.
Most observers expect first hints of the central bank heading for the exit to come then, likely by dropping robust language about risks or its intention to hold interest rates at “present or lower” levels from its carefully-crafted “forward guidance” statement.
For now, “it looks extremely unlikely that the ECB wants to steer market expectations in between the first and second rounds of the French elections,” ING’s Brzeski said.
“Thursday’s meeting will probably be fairly uneventful,” agreed Unicredit’s Valli.