Draghi Seen Taking Slowest Possible Path Out of ECB StimulusBy and
Economists only predict change to language on growth risks
Governing Council scheduled to meet in Tallinn on June 7-8
The European Central Bank has convinced economists that it’ll take policy normalization as gradually as it can.
Ninety percent of respondents in a Bloomberg survey said the ECB will use its meeting on Thursday to acknowledge that the risks surrounding the euro area’s recovery are balanced. Beyond that, the 60 analysts are split on whether the central bank will remove its easing bias on interest rates, and the proportion expecting an announcement by September on the future of the bond-buying program has fallen since the previous poll.
Amid a recovery that appears stronger by the day, the Governing Council looks set to use the Tallinn gathering -- it occasionally meets outside Frankfurt -- to have its first formal discussion on what an exit from stimulus might look like. Even so, President Mario Draghi and some of his colleagues have damped expectations for any significant signals, warning that weak price pressures show there is no reason to rush to withdraw monetary support.
“The Governing Council is likely to remain very cautious in its communication about the exit strategy in an environment where, despite the good growth performance, the outlook for inflation remains bleak,” said Philippe Gudin, chief European economist at Barclays Plc.
Euro-area manufacturing and services continued to expand at the fastest pace in six years in May, according to IHS Markit’s composite Purchasing Managers’ Index. Chris Williamson, chief business economist, said the outlook “seems to be tilting to the upside.”
At the last policy meeting on April 27, Draghi said that risks to growth were “moving toward a more balanced configuration” but were still tilted to the downside. Whether the “downside” reference is dropped has become a focal point for observers trying to gauge if a tipping point has been reached.
The ECB has “set the stage for such a move, flagging over the last two-to-three months a progressive reduction of downside risks,” said Marco Valli, an economist at Unicredit in Milan. “The intention is to make any rhetoric shift as gradual as possible in order to reduce the probability of an unwarranted tightening of financial conditions.”
Of the six Executive Board members who set the agenda, Sabine Lautenschlaeger has recently said the risks are now balanced, Benoit Coeure has said they are rebalancing, and Yves Mersch has said that moment is within reach. Draghi, Chief Economist Peter Praet and Vice President Vitor Constancio have remained more cautious.
In contrast to improving economic growth, euro-zone inflation slowed to 1.4 percent last month and the core rate dropped to 0.9 percent. The ECB says it isn’t yet convinced that inflation can hold at its goal of just under 2 percent over the medium term without monetary support.
Nearly half of the survey respondents said the ECB will cut its 2017 inflation forecast when it publishes fresh projections on Thursday. Most say the predictions for 2018 and 2019 will be left unchanged.
Given that outlook, economists have pushed back the date at which they see the ECB dropping its guidance that rates might be cut further. Most now see that happening by the July 20 meeting, compared with a forecast in the April survey that it would happen in Tallinn.
While most economists still see the ECB announcing in September what its intentions are for the quantitative-easing program, they’ve become less convinced. The 54 percent expecting a decision then is down from 67 percent in the previous poll. The central bank currently says it’ll keep buying debt at 60 billion euros ($68 billion) a month until at least the end of the year. The tapering of QE is seen as starting by the first quarter of 2018 and taking seven months, up from six months predicted previously.
After Draghi and Praet went out of their way to knock down any debate over whether interest rates might rise before QE ends, economists are sticking to their forecast that the deposit rate won’t be lifted until the third quarter of 2018.
“Communication will be delicate,” said Kristian Toedtmann, an economist at DekaBank. “On the one hand, the ECB has to align its forward guidance and risk assessment with the improved economic conditions in order to remain credible. On the other hand, the ECB doesn’t want to spark expectations of a near-term tightening.”