Daily Management Review

Amid Heightened Italy Risk, ECB Poised to Extend its Bond-Buying Program


12/08/2016




Amid Heightened Italy Risk, ECB Poised to Extend its Bond-Buying Program
Just days ahead of the all-important December meeting of the European Central Bank at which the bank's president is set to reveal the future of its bond-buying program, for Mario Draghi, the timing of Italian referendum and its outcome could not have come at a worse time.
 
Inflation and economic projections and the extension and tweaks to the quantitative easing (QE) program are on the menu of this meeting. The ECB is expected to extend the program through September 2017 and to keep the monthly bond purchase volume at 80 billion euros, as opined by a vast majority of economists polled by Reuters.
 
"We expect the ECB to extend its asset purchases at the same pace through September 2017 while dropping the restrictions on not being able to purchase assets yielding below the depo(ist) rate and below a 2-y(ear) maturity," writes Nick Kounis, Head of Macro and Financial Markets research at ABN Amro, in a note.
 
With a plethora of measures and instruments ranging from negative deposit rates to spur lending and the buying of bonds, the ECB is trying to push inflation back to its goal of below but close to 2 percent. Inflation is at least moving in the right direction while inflation is still low compared to the bank's target.
 
Inflation is at its highest level since April 2014 as shown by the recent inflation data which shows a slight rise to 0.6 percent in November compared to last year. For the first time since 2009 to 9.8 percent, Euro zone unemployment has fallen below 10%. And an uptick in growth for the currency union is pointed by the economic indicators. And this outlook has not been damaged by neither Brexit nor the election of Donald Trump as U.S. president. Despite widespread criticism, its QE program has helped to improve the situation, the ECB insists.
 
"I would say in spite of the many crises of the last six, seven years, we continue to steer the ship towards this mandate, and we foresee that inflation will go back towards our objective of an inflation rate below but close to 2 percent by 2018/2019," ECB President Draghi said in an interview with El Pais, the Spanish newspaper on November 30.
 
Until it sees a sustained adjustment in the path of inflation consistent with its inflation aim, the ECB intends to maintain its current stimulus.
 
"Given the words of Mario Draghi who now sees inflation back at target in two years time, it is probably right to also ask, when they will reduce its monetary stimulus. Unless the Governing Council agrees to aim for higher-than-target inflation or reduces its inflation outlook significantly, a serious discussion of tapering is necessary," writes Anatoli Annenkov Senior European Economist at Societe Generale in a note. "Will there be a better moment to start tapering beyond 2017?" he asks.
 
(Source:www.cnbc.com) 






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