Wednesday, September 28, 2022

ECB seen firmly on hold but may set stage for June shift

ECB seen firmly on hold but may set stage for June shift

FRANKFURT - The European Central Bank is set to keep its ultra-easy policy stance firmly in place on Thursday but may acknowledge better growth prospects, setting the stage for a small signal as early as June about an eventual reduction of stimulus.

ECB President Mario Draghi is likely to point to still-weak inflation, muted wage growth and an uncertain outlook to argue that easing off the accelerator now could unravel years of work that have consumed much of the ECB's firepower, a poll of analysts showed.

But Draghi may acknowledge the euro zone's solid growth momentum, surging consumer and business confidence, and receding political risk after the first round of France's presidential vote put a pro-euro centrist in pole position.

The mild optimism would come after years of extraordinary but untested stimulus measures.

Having missed its 2 percent inflation target for four consecutive years, the ECB is buying 60 billion euros worth of bonds per month at least until the end of the year and plans to keep rates deep in negative territory until much later.

But growth is on its best run since the global financial crisis, inflation is comfortably above 1 percent and the ECB's policy arsenal is nearly depleted, all fuelling calls by conservative policymakers to start plotting the way to the exit.

In a departure from the bank's long-held, more pessimistic stance, ECB board member Benoit Coeure, a key ally of Draghi, recently argued that the balance of risk for the economy is now largely balanced.

Coeure's view may not signal an imminent policy shift but suggests growing confidence in the outlook and a willingness to entertain the once-taboo subject of scaling back stimulus.

The ECB announces its rate decision at 1145 GMT and Draghi will hold a news conference at 1230 GMT.


The next step, possibly in June, could mean dropping a bias for even more policy easing and changing the wording of Draghi's regular opening statement to reflect improved prospects for the economy.

Last month, the ECB removed one phrase from the statement -- a pledge to act "using all the instruments available within its mandate" if needed -- to signal a diminishing urgency for more policy action.

Some or all the references to prevailing downside risks to the outlook, to the possibility of further rate cuts or to larger asset purchases may be taken out, sources with direct knowledge of the bank's deliberations told Reuters earlier.

Policymakers are likely to remain cautious, however, particularly those from the periphery of the bloc.

"Before getting too enthusiastic, not all is well in the euro zone," ING economist Carsten Brzeski said.

"Despite the cyclical upswing, unemployment rates in many countries remain far too high to reduce social inequality, government debt ratios have hardly come down in most countries, and further and necessary works on the structure of the monetary union have been put on hold."

Conservative policymakers meanwhile argue that too much stimulus may already be fuelling asset price bubbles, risking financial stability and eroding bank earnings so much that the measures could actually hold back lending and thwart growth.

The ECB may also need to preserve whatever firepower it still has left in case of renewed turmoil.

"We see only a short window for starting to withdraw the non-standard policy measures, with the next potential tail risk event approaching fast: Italian elections," Societe General economist Anatoli Annenkov said.

"We thus see a need for the governors to reach a compromise on an exit strategy over the summer."

Such a timeline would suggest cautious optimism from Draghi on Thursday, with the ECB readying for a more ambitious shift in June.

"We think that Thursday's meeting will be used by the ECB as a 'bridge' to the June rendezvous, which promises to be important," UniCredit economist Marco Valli said.

"If, as it now seems very likely, the French will elect a mainstream president, on June 8 the ECB will probably scale back some of its prudence and the new staff projections will finally show a broadly balanced risk assessment." -Reuters