Photographer: Thomas Lohnes/Getty Images

Draghi Seen Staying Strong on QE as Faster Inflation No Bar

  • Economists in survey see ECB bond buying continuing into 2018
  • Rising prices likely to draw German criticism in election year

The European Central Bank will wait until late this year before considering reining in its bond-buying plan, and won’t halt the program until well into 2018 at the earliest, economists say.

Even as euro-area inflation gathers pace, three-quarters of respondents in a Bloomberg survey said the ECB’s next major change to its stimulus will be announced no sooner than September. With underlying price pressures subdued, two-thirds of analysts said that decision will be to slow monthly purchases but extend them beyond December. None foresees any new measures when the Governing Council meets in Frankfurt on Thursday.

President Mario Draghi is likely to come under increasing political pressure in stronger economies such as Germany if he continues to add stimulus while prices climb and savers remain burdened with near-zero deposit rates. His concern lies more with core inflation and on the potential for shocks from national elections in the currency bloc, talks on the U.K.’s exit from the European Union and the start of Donald Trump’s U.S. presidency.

“Rising inflation in Germany may rouse opponents of quantitative easing,” said Tomas Holinka, an economist at Moody’s Analytics Inc. “Nevertheless, we think that any discussion about lowering asset purchases is premature and expect the ECB will wait until price growth is sustainable and political uncertainty eases.”

The ECB’s account of its Dec. 8 policy meeting underscored the divisions in the Governing Council, with the 25-member body failing to reach a unanimous decision on QE. Officials eventually opted to prolong purchases by 9 months to the end of the year and slow the monthly pace to 60 billion euros ($64 billion) from 80 billion euros, starting in April.

While most economists said the ECB’s next step will be to slow and extend QE again, about a fifth said purchases will be reduced but not prolonged. Just 4 percent expect the ECB to continue the program beyond 2017 at the currently planned pace.

Draghi’s December announcement included a promise to step up buying again if needed. Tapering -- a stepwise reduction of monthly purchases to zero, as the U.S. Federal Reserve did -- hasn’t been discussed by the Governing Council, and economists were split over how QE will end. Just under half said Draghi will give a specific pace of tapering, while just over half said he’ll announce reductions one step at a time without pledging to keep doing so.

While some respondents said unwinding effectively started with last month’s decision, more than 60 percent said it won’t get under way until at least the Dec. 14 Governing Council meeting. The median estimate was that the process will take 9 months.

That could feel like a long time in countries where inflation is already climbing to multi-year highs. German consumer-price growth jumped to 1.7 percent in December from 0.7 percent, a record increase and the quickest pace since 2013. Newspapers and commentators have called for a faster exit from stimulus, and Finance Minister Wolfgang Schaeuble urged a gradual “normalization” of policy. Germany will hold parliamentary elections in the fall.

The ECB’s response has been that inflation in the region as a whole is far weaker. While the rate almost doubled to 1.1 percent in December, also the highest since 2013, that’s still well below the goal of just under 2 percent. Core inflation, excluding energy and food, was 0.9 percent and has barely budged in more than a year.

Too Soon

Executive Board member Yves Mersch said this month that it would be “absolutely premature” to claim victory over a weak economy. 

French Governor Francois Villeroy de Galhau said at a conference in Paris on Monday that worries about a return of inflation are “greatly exaggerated,” and the muted reaction of wages to stimulus measures is puzzling, particularly in Germany.

At their last meeting, policy makers questioned whether faster headline inflation might lead to higher pay as workers realize that their real incomes are dropping. The survey signaled it will, with three-quarters of respondents saying price gains are more likely to feed into core inflation than to hurt consumer spending.

“The ECB faces a tricky first quarter as inflation in the euro area very likely could rise above 2 percent briefly as energy inflation surges,” Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics Ltd. in Newcastle. “But Mr. Draghi will stick to his guns that core inflation now is the key.”

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