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article imageDraghi to calm waters ahead of easy-money exit

By Tom BARFIELD (AFP)     Jul 19, 2017 in Business

European Central Bank chief Mario Draghi will carefully prepare markets for a long-awaited end to the institution's easy-money policy Thursday, analysts expect, but stop short of calling time immediately.

Most observers predict the Frankfurt-based institution will chart a path to the exit from its "quantitative easing" (QE) mass bond-buying programme at one of its four remaining meetings in 2017.

That will make a press conference on Thursday "a balancing act that requires all of Draghi's verbal acrobatic skills," said analyst Carsten Brzeski of ING Diba bank, as the ECB must prime the markets for an end to QE, but also be careful not to sow panic.

Along with historic low interest rates and cheap loans to banks, the ECB's monthly purchases of 60 billion euros ($69 billion) of government and corporate bonds are designed to pump cash into the economy, powering growth and pushing up prices.

While inflation is still sluggish, economic growth in the 19-nation eurozone has picked up strongly enough to dispel the fears of deflation that had prompted policymakers to launch the scheme.

And the ECB could soon reach technical limits to its bond buying that will make the already controversial programme even more difficult to continue much beyond the present cut-off point in December.

- Tiptoeing towards exit -

Investors are on high alert for signals from the ECB  sensitive to even the tiniest changes in gover...
Investors are on high alert for signals from the ECB, sensitive to even the tiniest changes in governors' carefully-weighed statements.
Daniel ROLAND, AFP/File

Such signs mean investors are on high alert for signals from the central bank, sensitive to even the tiniest changes in governors' carefully-weighed statements on "forward guidance".

At a meeting in June, policymakers chose to remove a suggestion that interest rates could be lowered still further if necessary from their regular statement.

That was seen by many as the first hint that the ECB would begin adjusting its policy as economic growth gathers pace.

Speculation was ratcheted up yet further when Draghi told a central banking conference late last month that "as the economy continues to recover... the central bank can accompany the recovery by adjusting the parameters of its policy instruments".

This was interpreted by markets as a gesture towards "tapering", or winding down bond-buying. And the remarks pushed up bond yields -- the returns investors can expect from buying government debt -- and the value of the euro.

If those trends continue, they could sap growth in the single currency area. So, the ECB hastily sought to clarify Draghi's words.

Nevertheless, the president's comments "opened the back door to announce a reduction in monthly bond purchases from next year in September or October," commented analyst Kristian Toedtmann of Deka bank.

ECB staff are studying different ways the bank could approach tapering, Bloomberg News reported Tuesday citing anonymous sources, although policymakers have yet to set a date for any announcement.

Governors are likely to move later this year "even if the little remaining inflation data to be published before then does not clearly point upwards," Toedtmann added.

Justifying an end to QE on inflation data alone will be difficult, as eurozone prices grew just 1.3 percent in June -- well short of the ECB target of just below 2.0 percent.

Central bank forecasts include inflation of 1.5 percent this year and just 1.3 percent in 2018.

- Rate rise far off -

Any observers looking for interest rates to rise from their historic lows likely have a long wait ahead, analysts agree.

The ECB has for many months stated that rates will only start to rise "well after the horizon of net asset purchases" has come to an end.

The bond-buying programme itself might not be completely wound down until far into 2018, while low inflation expectations stretching into 2019 would make it difficult to justify higher rates.

Furthermore, "well-anchored expectations about future interest rates will help the ECB limit unwanted large market reactions to the impending end of QE," adding to the pressure to hold rates down, Deka's Toedtmann noted.

More about ecb, Eu, Eurozone, Inflation, Banking
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