Frankfurt - Mario Draghi’s progress toward a stimulus exit is likely to stay slow
for now, with inflation too low for comfort and the global economy up
against a trade-war-in-waiting.
US tariffs and retaliation by Europe and others could harm the outlook for the eurozone, where exports have played a huge role towing the economy out of its slump. That could add to the European Central Bank (ECB) president’s argument when he pushes back against some ECB officials lobbying for a change to policy guidance.
If, contrary to expectations, more optimistic Governing Council members do win some concessions at Thursday’s policy meeting in Frankfurt, any language tweaks are expected to be minor. The need for patience and persistence will also be reflected in new growth and inflation forecasts, where any revisions will also likely be minimal.
The euro was little changed at $1.2405 at 9:27 Frankfurt time.
So far, inflation has been a road block to scaling back support. At only 1.2% in February, the rate remains far from the ECB’s goal of just below 2%. Going forward, consumer-price growth is set to pick-up gradually.
Draghi has expressed confidence that the economy’s continued strength will eventually fuel price pressures. Expansion last year was the strongest in a decade, with exports rising the most in almost three years in the fourth quarter.
What Bloomberg economists say...
“There’s not a whole lot more that monetary policy can do to jump-start inflation apart from intentionally overheating the economy - a step that few central bankers would argue is a good idea.”- David Powell and Jamie Murray, Bloomberg Economics.
Policy makers already identified increased trade protectionism - as well as exchange-rate fluctuations - as downside risks in January. Since then, gauges of market-expected future volatility have eased.
At the same time, government-bond yields and the euro have risen on the back of the region’s optimistic outlook. Growth in the coming years is forecast to exceed the rate the economy can sustain long-term, reducing economic slack.
Political uncertainty triggered by a strong showing of anti-establishment parties in Italian elections has the potential to damp prospects. Confidence measures have already started to retreat from multi-year highs.
For Draghi, who has pledged to buy €30bn of
assets until at least September and keep interest rates unchanged until
well past the end of purchases, that may just be another reason to stay
the course on stimulus for now.
* Sign up to Fin24's top news in your inbox: SUBSCRIBE TO FIN24 NEWSLETTER