Though economy surprises, ECB to stick with stimulus program
FRANKFURT, Germany – Europe’s economy is surprising people with its strength. But don’t look for the European Central Bank to signal a withdrawal from its stimulus efforts at Thursday’s meeting.
ECB President Mario Draghi has been cautious in recent days, stressing that the economy still needs support, especially when it comes to inflation, which is still below what the bank considers ideal.
Here’s a quick guide on what to expect from the meeting of the bank’s 25-member governing council and following news conference. It’s being held in Tallinn, Estonia, one of the occasional meetings held away from the bank’s Frankfurt headquarters.
GROWTH IS STRONG
Draghi has been going out of his way to describe the current economic upturn as a result, to a great extent, of the bank’s policies. In particular, he points to the 5 million new jobs that have been created as the 19 countries that use the euro bounce back from troubles over high government and bank debt in several member countries.
The economy expanded 0.5 percent in the first quarter and the ECB forecasts 1.8 percent growth this year.
But that brighter view of the future also assumes the stimulus continues. “A very substantial degree of monetary accommodation is still needed,” Draghi said at his last news conference, on April 27.
NO STIMULUS WITHDRAWAL – YET
The emphasis the ECB puts on its role implies that it believes growth isn’t yet strong enough for it to start dialing back on the bond-buying stimulus program it has been running since March 2015.
Each month, the bank has been purchasing 60 billion euros ($68 billion) in government and corporate bonds from banks. It pays for the purchases with newly created money.
The purchases push that new money into the economy, a step that can increase inflation. And they drive down longer-term interest rates, making it cheaper for governments and businesses to borrow and spend. The central bank has also set its short-term interest rate benchmark at a record low of zero.
Analysts expect the ECB to sketch out a roadmap for tapering the bond purchases stimulus at its September 7 meeting. They expect it to start tapering the size of the monthly purchases in early 2018 until they are ended in mid-year or later. Only after that would interest rate benchmarks go up.
A key aspect of Thursday’s meeting will be whether the central bank forecasts a sustained upturn in inflation, especially the core inflation figure, which does not count volatile items like the price of oil and has been stuck at a weak 0.8-0.9 percent for a year.
Recent pronouncements indicate the central bank does see inflation picking up yet. The written account of the bank’s deliberations at its April 27 meeting indicated it felt inflation pressures remained “subdued and had yet to show a convincing upward trend.”
Look for tweaks in the bank’s written statement. Analysts expect it to say that risks to the recovery are “balanced,” instead of skewed to the downside. A provision that interest rates could go even lower might be dropped.
A bigger step would be dropping the bank’s promise that it could add even more bond purchases if needed. That promise might be dropped in July as a final prelude to the stimulus exit announcement in September.
Tapering the bond purchases will have wide-ranging effects. Those would likely include higher interest costs for longer-term borrowers, such as governments and people buying houses with mortgages. Returns on savings accounts and other low-risk holdings should rise from current paltry levels, increasing their attractiveness relative to stocks. Weak companies that can’t pay normal borrowing costs might go out of business – a development that economists think would reallocate capital to more productive uses.