Daily Management Review

Since Economic Outlook Is Uncertain, ECB To Keep Taps Open


06/08/2017




Since Economic Outlook Is Uncertain, ECB To Keep Taps Open
As inflation remains below its target despite stronger economic growth in the euro zone, the European Central Bank is likely to keep the money taps fully open.
 
The ECB President Mario Draghi is yet to be convinced that the recent rebound in inflation is durable because wage growth remains sluggish even though the currency bloc's economy has been on its best run for a decade.
 
Including its 2.3 trillion euro ($2.59 trillion) bond-buying program and sub-zero interest rates, the ECB is widely expected to keep policy unchanged despite resistance from cash-rich Germany and against that backdrop.
 
"We expect the ECB to act very, very cautiously when delivering its economic assessment," David Kohl, a currency strategist at Julius Baer, said.
 
ECB is likely to trim its estimates for inflation when it presents its new staff projections for 2017-19 and is likely to nudge up its growth forecasts, according to the media, quoting sources.
 
Including a pledge to cut rates further if necessary to bring inflation back to the central bank's target of just under 2 percent. the mixed outlook was seen strengthening the case for keeping the ECB's easy policy in place.
 
"It raises the probability that the ECB makes no changes to its language of forward guidance at this meeting," economists at Nomura wrote in a note to clients.
 
Not far below a seven-month high of $1.1285 hit earlier this month, The euro was steady against the dollar.
 
Political uncertainty ahead of elections in Germany and Italy, the piles of unpaid loans weighing on banks in countries like Italy and Portugal and big debts overhanging governments and companies are among the other factors that are making the ECB cautious about its policies and any form of policy change.
 
By removing a reference to "downside risks" in its statement, the ECB will acknowledge the improved economic outlook, reported news agency Reuters citing information from sources.
 
But it will not be until autumn, when policymakers hope the economic picture will have become clearer, that any announcement on its quantitative easing (QE) program is likely to be put off to.
 
"We still expect a compromise to be reached, implying more QE into next year, but at a reduced monthly pace," economists at Societe Generale said in a note.
 
"While data-dependent, we also expect further quarterly 10 billion euro reductions, ending QE in September 2018."
 
Spanish lender Banco Popular was bought by rival Santander on Wednesday in an ECB-orchestrated rescue and Draghi is also certain to face questions about that deal.
 
There are two struggling banks in Italy's Veneto region, which like Popular are weighed down by bad loans and investors were wondering if the ECB move on Popular would have implications for those two banks in Italy's Veneto region.
 
By pumping 1.2 billion euros of private capital into the two regional banks, Italian banks are considering assisting in a rescue of Popolare di Vicenza and Veneto Banca, reported Reuters citing information from sources hours after the Popular's rescue.
 
(Source:www.reuters.com) 






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