ECB to hold firm through trade war and slowdown fears

Inflated euro sign is seen outside the new headquarters of the European Central Bank (ECB) in Frankfurt, January 22, 2015. — Reuters pic
Inflated euro sign is seen outside the new headquarters of the European (ECB) in Frankfurt, 22, 2015. — Reuters pic

FRANKFURT AM MAIN, July 24 — Analysts expect the European Central Bank to leave unchanged Thursday plans to end massive stimulus for the eurozone by December, defying fears that a global trade war or domestic slowdown could sap the single currency area.

ECB President Mario Draghi may also dismiss accusations from US President Donald Trump that he is manipulating exchange rates to ’s disadvantage.

But with policymakers’ eyes on financial markets, “the main focus… will be on cementing the message from June” that the bank is withdrawing its support in response to the strength of the economy and its confidence it will eventually meet its target, economist Carsten Brzeski of ING Diba bank predicted.

Draghi surprised observers last month by announcing he would slash monthly purchases of government and corporate bonds from €30 billion to €15 billion (RM142.69 billion to RM71.34 billion) from October, before ending them at the end of the year.

Alongside ultra-low interest rates, -buying or quantitative easing (QE) was designed to pump cash through the financial system and into the real economy, stoking growth and in turn powering inflation towards the central bank’s 2.0 per cent price stability target.

After more than three years and some €2.4 trillion of QE, eurozone inflation hit 2.0 per cent in June after 1.9 per cent in May.

Such a one-off flirtation with its goal is unlikely to move the ECB from its plans to leave interest rates at their historic lows — the other pillar of its support to the economy — until at least summer next year.

Draghi has always been clear that the inflation target must be met “over the medium term”.

The latest ECB projections, though, see annual inflation hovering at 1.7 per cent between this year and 2020 — still short of the central bank’s aim for the foreseeable future.

Analysts point to “core” inflation — excluding rapidly changing items like energy and food costs — of just 0.9 per cent in June as an indicator that will stay the ECB’s hand.

“The ECB still has a long way to go, to say the least,” Brzeski said.

Trump lashes out

Observers expect all the more caution from the ECB as the growth outlook for the eurozone has grown more uncertain.

Expansion in the single currency area slowed to just 0.4 per cent between January and March, although some indicators point to a rebound in the second quarter.

Meanwhile the first shots in a transatlantic trade war that risks further slowing growth have already been fired.

The EU hit a slew of American goods including jeans, peanut butter and motorcycles with tariffs in retaliation for US President Donald Trump’s June introduction of border taxes on steel and aluminium.

On Wednesday, European Commission President Jean-Claude Juncker will visit the White House, hoping to talk Trump out of a new round of levies on car imports to America.

Meanwhile, the second, more active front in Trump’s trade war — with — risks sapping global trade overall, with knock-on effects for open eurozone like powerhouse Germany.

“Downside risks to the (economic) outlook mainly relate to the threat of increased protectionism,” Draghi told European Parliament lawmakers this month, urging political leaders to “lend support to multilateralism and global trade”.

Such concerns will likely keep the question of the mooted interest rate rise up to a year away far from central bankers’ minds this month — much to Trump’s displeasure.

“China, the European Union and others have been manipulating their currencies and interest rates lower… taking away our big competitive edge,” he charged via Twitter Friday, reiterating a longstanding complaint of his White House against Draghi’s monetary policy.

“While some members (of the ECB’s governing council) are impatient to begin raising interest rates, the vast majority want to watch the incoming data” to guide their decisions, Capital Economics analyst Jennifer McKeown noted.

Draghi declared even the withdrawal from bond-buying “subject to incoming data” at June’s press conference — leaving him wiggle room to extend the programme further if the eurozone economy suffers any fresh blows. — AFP

Source: The Malay Mail Online

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