Frankfurt am Main (AFP) – The European Central Bank on Thursday signalled greater confidence in the eurozone economy and its own chances of hitting its elusive inflation goal by dropping talk of boosting its mass bond-buying programme.
Fears of a transatlantic trade war and political deadlock in Italy did not deter policymakers from the strong hint that the end of their support for the 19-nation single currency area is drawing closer.
The latest monetary policy statement from the bank’s governing council no longer mentioned that policymakers stood ready to increase their 30-billion-euro ($37.1 billion) per month asset-purchasing programme “in terms of size and/or duration” should the global outlook become less favourable.
The phrase had been included in every communique since December 2016.
The euro jumped up immediately after the ECB statement was released, from $1.237 before to $1.243.
“The change is arguably the ECB’s first cautious step along a path of gradual policy normalisation” away from 30 billion euros ($37 billion) per month of bond-buying and historic low interest rates, Capital Economics analyst Jennifer McKeown commented.
Bond purchases at that pace are currently slated to continue until September at least, while the ECB also left key interest rates unchanged.
Probably looking to calm market reaction, ECB President Mario Draghi “is likely to signal that interest rate hikes are a distant prospect” during a press conference starting at 2:30 pm (1330 GMT), McKeown added.
Along with historic low interest rates, the “quantitative easing” bond-buying scheme is designed to stoke economic growth by pumping cash through the financial system, helping boost inflation to the ECB’s target of just below 2.0 percent — seen as most favourable for long-term growth.
The ECB has bought more than 2.3 trillion euros of government and corporate debt since launching the stimulus programme.
But while eurozone GDP expansion surged to 2.3 percent last year, price growth has not picked up in step.
In December, ECB forecasts called for inflation to hit 1.7 percent by 2020 — still slightly short of its goal.
Most observers expect little change in new growth and inflation forecasts also due from Draghi.
– Boardroom battle –
Thursday’s positive signal may reflect discord on the ECB’s 25-strong governing council, made up of the executive board and governors from the 19 member states’ central banks.
Minutes from January’s meeting showed policymakers who favour dismantling bond-buying faster in light of stronger growth are increasingly vocal.
They were boosted last month when board member Benoit Coeure judged that “in future, the eurosystem (of the ECB plus the national central banks) can retreat as a buyer” without unravelling easier financing conditions.
“The end of QE is getting closer. The risk of deflation is clearly behind us and the only question is how to moderate and implement this exit,” analyst Carsten Brzeski of ING Diba bank said.
But so-called “hawks” have long remained outmatched by “doves”: governors who think the ECB should keep fuelling the recovery until it is certain of reaching its inflation goal.
– Italian conundrum –
Markets have been anxiously awaiting the ECB’s next move after an equities slump, rumblings of a possible trade war between Europe and the United States, and an Italian election Sunday that swept eurosceptic populist parties to record results.
A higher euro also threatens the ECB’s inflation goal by sapping exports and economic growth and making imports cheaper.
President Donald Trump’s vow to slap tariffs on steel and aluminium imports into the United States sparked the departure of his top economic advisor Gary Cohn and promises of countermeasures from the European Union.
Taken to extremes, a border tax duel could threaten growth and undermine inflation.
The threat could prompt Draghi to repeat his August 2017 warning that “a turn towards protectionism would pose a serious risk” for global economic growth, following up a January rap on the US’ knuckles for appearing to talk down the dollar against the euro.
Meanwhile, Sunday’s elections in Italy produced an unclear result that will make forming a government for the eurozone’s third-largest economy difficult, with the parties that made the biggest gains promising lower taxes and higher social benefits.
That makes it less likely they will heed Draghi’s longstanding call to reform and cut debts and deficits while the sun shines.
The Italian ECB chief may also find himself forced to defend his job, if journalists confront him with right-wing League party leader Matteo Salvini’s Monday declaration that “the common currency system is bound to come to an end”.
“The euro is irrevocable,” Draghi insisted last year in a testy exchange with an Italian member of the European Parliament on a similar line of questioning.