Growing threats to eurozone to test ECB’s nerve

Growing threats to eurozone to test ECB’s nerve

FRANKFURT,. Multiplying signals of turbulence ahead for the 19-nation eurozone will not keep European Central Bank chief Mario Draghi from sticking today to plans to end massive economic stimulus, analysts expect.

The list of potential pitfalls runs from an intra-EU row over Italy’s budget to increasing risk of a no-deal Brexit, trade tensions with the United States, turmoil in emerging markets, rising oil prices and jumpy economic indicators.

A major upset could threaten growth in the eurozone — and the ECB’s years-long quest for its goal of inflation steady at just below 2.0 per cent.

The official account of September’s governing council meeting showed some members felt “a case could also be made for characterising the risks to activity as now being tilted to the downside.”

While Draghi ultimately declared positive and negative risks “broadly balanced,” the record showed discord among the 19 national central bank chiefs and six board members who set policy.

Berenberg bank economist Holger Schmieding judged that “six weeks make a difference — not enough to change policy, though,” recalling that the minutes also showed policymakers agreed to look past “small changes” in the economic outlook.

Draghi will give his own take on the gathering clouds in a 2.30pm (1230 GMT) press conference.

Inching out of stimulus

Draghi acknowledged last month that some threats “have become more prominent recently.”

But he told European Parliament lawmakers he was confident of hitting ECB forecasts showing 1.7 per cent average price growth between 2018 and 2020.

Capital Economics analyst Jennifer McKeown pointed out that “events since the ECB’s last meeting might have led it to reassess the downside risks to (economic) growth, but not necessarily inflation,” which is influenced by longer-term factors such as wage increases.

Policymakers’ confidence for inflation has prompted gradual steps towards ending mass purchases of government and corporate bonds, known as “quantitative easing” (QE).

Launched in March 2015, the scheme is designed to pump cash through the financial system to firms and households, powering growth and, in turn, inflation.

From €30 billion (RM143.1 billion) per month, the ECB has throttled bond-buying to €15 billion per month between October and December, when it is slated to end.

Meanwhile, the central bank will keep credit flowing by leaving interest rates at historic lows “at least through the summer of 2019” and possibly beyond — leaving it well behind the US Federal Reserve, which is gradually raising rates.

And some of the easy-money effect of QE will be preserved as the ECB reinvests the proceeds from its €2.5 trillion stock of bonds.

Manageable threats

The slow-burning nature of many threats to growth means QE may end before any of them materialise.

A US-EU trade row over tariffs Washington imposed on metals imports and threatened on cars has been on ice since July, although American officials are displaying growing impatience.

Meanwhile, economists see little risk of Italy running out of buyers for its debt, even though Rome has ignored a credit rating downgrade from Moody’s on Friday.

But confrontation remains on the agenda after Brussels requested the Italians present a revised budget within three weeks, the first-ever move of its kind against an EU government.

As for Brexit, while European leaders last week blew through another deadline to reach a deal, there is still time before the UK’s departure date of March 29.

Nor are weakening indicators of eurozone expansion — like an October slump in the eurozone-wide purchasing managers’ index (PMI), a forward-looking signal on economic activity — so drastic that they should undermine inflation expectations.

“It would definitely need a severe growth accident, an escalation of the Italian crisis or trade tensions with tangible consequences on financial markets before the ECB would change its course,” ING Diba bank economist Carsten Brzeski said. — AFP