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ECB is still far away from reaching its inflation objective.
World Economy

Analysts Hope ECB Will End QE

Expectations are high that the European Central Bank will hint that it is heading for the exit from its easy-money policy when governors meet in Estonian capital Tallinn Thursday. Most analysts predict the bank’s €60 billion ($67.4 billion) monthly bond purchases will continue and interest rates will remain at historic lows.
But they believe policymakers will begin laying the groundwork for an announcement later this year about plans to wind down bond-buying, by offering a sunnier economic outlook for the 19-nation eurozone, AFP reported.
“The ECB governing council needs to take no major policy decision beyond tweaking its guidance a little to keep up with the eurozone’s broad-based and resilient economic recovery,” said economist Holger Schmieding of Berenberg bank.
Bond-buying and low interest rates were introduced at a time when the ECB feared the threat of deflation—or steadily decreasing prices that undermine economic activity.
By pumping cash through the financial system and into the real economy, the bank believes it has stimulated growth and pushed inflation back towards its target of just below 2%. Inflation has been on a rollercoaster ride in recent months, hitting the 2% target in February before falling back again in March. The same pattern was repeated with a spike in April, to 1.9%, before a retreat in May.
Volatile food and energy prices are to blame for such rapid changes, policymakers say, while “core”, or underlying inflation discounting those elements remains sluggish.
ECB president Mario Draghi argues that wages—which he dubs the “linchpin” of price growth—are not rising fast enough to drive inflation, even as the eurozone economy enjoys healthy expansion.
“Deflationary risks might have disappeared, but the ECB is still far away from reaching its inflation objective,” said economist Carsten Brzeski of ING Diba bank.
Nevertheless, “the ECB would be blind not to acknowledge the cyclical upswing in the eurozone” in its press conference Thursday, he added.
In its carefully-weighed policy statements, the central bank has long warned of risks threatening the eurozone recovery.
This in turn has justified language elsewhere in its “forward guidance” suggesting that if economic activity slowed, policymakers could lower interest rates even further or boost bond-buying back to its previous level of €80 billion per month.
Observers now expect the ECB to highlight economic risks “balanced” between positive and negative, justifying dropping one or both commitments to signal growing confidence in the economy. That would not herald a quick exit from bond-buying.
Draghi told European Parliament lawmakers last week he is “firmly convinced” the eurozone’s newfound robustness depends on ECB interventions.

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