BERLIN: The European Central Bank’s (ECB) decision makers meet on Wednesday buoyed by the successful debut of a mass bond-buying spree designed to kickstart growth and will likely quash talk of it wrapping up early.
Analysts say ECB chief Mario Draghi is expected to give short shrift to any suggestion of a premature end to the quantitative easing (QE) program, the long-awaited and controversial gambit launched by the central bank last month.
Amid ongoing uncertainty about cash-strapped Greece, the first volley of the ECB’s 1.1-trillion-euro ($1.2 trillion) scheme offered some good news, getting off to a solid start by meeting its target.
That has fed speculation that the anti-deflationary policy of buying around 60 billion euros of public and private bonds each month could be stopped before its planned September 2016 end date.
But RBS economist Richard Barwell said he doubted Draghi would follow such a course as confidence in the ECB’s future actions was so crucial to the current markets.
“We should therefore expect the driver’s determination to complete the journey to be a central theme in the ECB’s communication strategy,” he said, ahead of the regular policy-setting governing council’s meeting in Frankfurt this week.
Launched on March 9, the strategy behind the ECB’s QE program is akin to those of the US Federal Reserve and the Bank of England to pump money into the eurozone with massive purchases of debt to bring down borrowing costs and in turn foster easier credit.
“A success,” remarked Berenberg bank economist Christian Schulz after nearly 61 billion euros in government and corporate debt was purchased in the first round, despite fears of a possible shortage of assets to buy.
“The operational implementation has been smooth and the policy effectiveness probably exceeded the ECB’s own expectations,” he said.
‘Still sorely needed’
Jennifer McKeown, analyst at Capital Economics, said she believed that a “premature tapering,” or phase-out of the bond-buying program, was not the way to go.
“We still think that the policy is sorely needed,” she said, voicing expectations that Draghi would stress this week that most of the ECB’s governing council members still wanted to apply it in full.
A measure of its success has been a decline in government borrowing rates, with the biggest drop for France and Germany whose costs were already relatively low, while Belgium, Portugal and Ireland in particular have also benefited.
The fall in the euro’s value against the dollar, also a consequence of QE, sits well with the ECB’s goals.
A weak euro favors exports by eurozone companies, thus encouraging growth, and makes the cost of buying goods abroad more expensive, driving up inflation.
Since the start of the year, the single currency has lost 11 percent of its value.
Some have begun to fear however that the euro’s weakness could propel inflation higher than 2.0 percent, or slightly beyond the ECB’s target.
More, not less QE?
“When does the exit begin?” asked Germany’s Handelsblatt business daily on Thursday.
ECB executive board member Yves Mersch addressed the issue of a possible “overdosing” on QE this week.
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-percent annual inflation.
For Jonathan Loynes, of Capital Economics, the eurozone will probably need more QE rather than less to reboot the economy. “In short, the ECB still has a lot more work to do,” he said.
And Berenberg’s Schulz said it was up to eurozone governments “to underpin the upswing with further structural reforms,” a message Draghi is likely to reiterate at Wednesday’s meeting.
The meeting is being held a day earlier than normal to enable central bankers to attend an IMF gathering in Washington starting Friday.