ECB to keep liquidity floodgates open


FRANKFURT: The European Central Bank (ECB) will be keen to stress on Wednesday that it has no plans to roll back controversial policy measures, as signs multiply that its medicine is beginning to work, analysts said.

ECB chief Mario Draghi is not expected to announce any changes in policy at the governing council’s regular meeting, held a day earlier than usual because of the traditional spring meetings of the World Bank and International Monetary Fund (IMF) in Washington at the weekend.

But he is likely to underline the positive effects of a raft of different policy measures, including a contested sovereign bond purchase program launched last month.

And he will be at pains to emphasize that there are no plans to “taper” the measures any time soon, analysts said.

“This week’s ECB meeting should be a non-event. QE has started to work and, for the first time in a long while, the ECB can sit back and relax. ECB president Draghi only needs to be careful not to overdo any self-congratulation, to avoid any premature tapering discussion,” said ING DiBa economist Carsten Brzeski.

QE or “quantitative easing” is a massive 1.1-trillion-euro ($1.2 trillion) sovereign bond purchase scheme aimed at bringing area-wide inflation back up to levels consistent with healthy economic growth.

Under the program, the ECB aims to buy 60 billion euros of bonds per month until September 2016.

The scheme has its critics, not least the head of the German central bank or Bundesbank, Jens Weidmann, who fear it will lessen pressure on governments to get their economies and finances in order.

When will tapering begin?
Opponents are likely to argue for an early roll-back of the program as the eurozone recovery picks up speed.

New data suggest that QE is already helping to get credit flowing again within the 19 countries that share the euro.

The ECB’s latest bank lending survey, published on Tuesday, showed that credit conditions are easing and demand for loans is on the increase.

“The first month of QE went smoother than some market participants had feared,” said Brzeski.

“We expect the ECB to keep policy rates on hold and do not expect any new measures or changes to the current purchase program from the ECB meeting. But we expect a fairly dovish tone from Draghi,” said Natixis economist Johannes Gareis.

On the data front, things appear to be moving in the right direction. Inflation was less negative in March than it was the previous month and sentiment indicators are all pointing upwards.

That may provide QE opponents at the ECB governing council with ammunition in calling for an early end to the program.

Last week, the German business daily Handelsblatt asked “When does the exit begin?”
ECB executive board member Yves Mersch also addressed the issue of a possible “overdosing” on QE recently.

He insisted that if inflation expectations grew above the ECB’s current forecast of 1.8 percent in 2017, “it would, of course, be appropriate to consider whether we need to adjust our plan.”

The latest data, however, shows that risk is still far off.

Prices in the 19-nation single currency bloc were down 0.1 percent in March, less than the drop in January and February but still a long way from the ECB’s target of just under 2.0 percent annual inflation.

“Against the background of a better eurozone outlook, some have argued that the ECB will taper QE before September 2016,” said Gareis.

But “we have some doubts and we do not expect the ECB to taper asset purchases any time soon,” he said.

UniCredit economist Marco Valli agreed.

“We continue to see a low probability that QE will be stopped before September 2016,” he said.


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