ECB to start laying groundwork for stimulus exit

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Europe

European Central Bank President Mario Draghi is set to start laying the groundwork for a cut in monetary stimulus when policymakers meet on Thursday.

According to Reuters report, it is likely to trim its inflation forecasts while modestly upgrading growth projections.

However, due to concerns that strong signals could raise market volatility and undo the plans, policymakers, led by ECB chief Mario Draghi, are seen shifting their message only incrementally.

A bigger move could come in October or December, before the central bank’s 2.3-trillion-euro bond purchase scheme expires at the end of the year.

AFP Photo

That divergence would go to the heart of the dilemma facing Draghi as he decides whether to extend or wind down the bank’s asset purchases: Euro zone economic growth is on its best run in a decade yet inflation will miss the target that forms the core of the ECB’s mandate for years to come.

Given additional concerns that strong signals could trigger market volatility and undo the bank’s plans, ECB policymakers are seen shifting their message only incrementally.

That would set the bank up for a bigger move in October or December, before its 2.3-trillion-euro (2.74 trillion US dollar) bond purchase scheme expires at the end of the year.

“The inflation outlook remains predictably anaemic, and if President Draghi is to be taken at his dovish word, that should imply filling up the bowl (with more stimulus),” Anatoli Annenkov, an economist at Societe Generale, said.

AFP Photo

But with growth exceeding expectations, unemployment falling fast and the threat of deflation long gone, some analysts say Draghi has few reasons to maintain what is essentially an emergency set up and that the main question is just how quick the exit should be.

“Despite recent euro strength, there is no compelling economic case to keep buying at the current rate – the macro outlook simply does not merit it,” Daiwa economist Chris Scicluna said.

Analysts predicted that no policy change on Thursday but that bond buys, now running at 60 billion euros a month, will be cut by a third in a decision later this year.

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