ECB sticks to stimulus exit plans despite darker outlook

Remains on track to end QE by year end

  • Investors looking to see whether risk assessment downgraded
  • ECB likely to acknowledge growth outlook has worsened
  • Italy’s conflict with EU may dominate press conference

The European Central Bank kept policy unchanged as expected on Thursday, staying on course to claw back unprecedented stimulus even as the growth outlook continues to darken and political turmoil in Italy looms large over the currency bloc.

Having exhausted much of its firepower with years of support, the ECB reaffirmed that its 2.6 trillion euro ($2.97 trillion) asset purchase scheme will end this year and rates could rise after next summer, sticking to a guidance first unveiled in June and repeated at every meeting since.

ECB chief Mario Draghi is nevertheless expected to acknowledge in his 1230 GMT news conference that the growth outlook has worsened as both domestic and external factors weigh on confidence, which would give the bank’s policy outlook a dovish undertone.

Such a nuanced message is likely to keep expectations for future rate hikes relatively benign with policymakers in the past arguing for only small and infrequent moves from late next year as growth slows to what is considered its natural potential rate after an exceptional run last year.

“The Governing Council expects the key ECB interest rates to remain at their present levels at least through the summer of 2019,” the ECB said in a statement.

Investors will look to see if Draghi maintains the ECB’s long-standing assessment that risks to growth are broadly balanced or whether he acknowledges the worsened outlook by highlighting downside risks.

The problem is that investors might take a change of risk assessment as a sign of an imminent policy move, and the ECB is not prepared for that.

So even if the growth outlook is worsening, Draghi could still call risks balanced, partly to prevent a shift in expectations.

Policymakers speaking in public and private have said the bar for extending the ECB’s bond purchase scheme is very high and that it is too early to reassess interest rate guidance, which calls for no change until “through” next summer.

Draghi is also expected to argue that inflation, the bank’s primary policy focus, is broadly following the path seen earlier, with headline prices possibly stronger on higher oil prices and core inflation on the weak side of expectations.

NO SUPPORT FOR ITALY

With the EU having taken the unprecedented step of rejecting Italy’s budget this week, Draghi is also expected to be quizzed about the cost of the escalating political fight between Rome and Brussels.

Draghi, himself an Italian, is expected to repeat that no individual member state can expect the ECB’s help, particularly one whose troubles are caused by a breach of European Union rules.

Its standoff with the EU has already cost Italy dearly through higher borrowing costs as investors ditched its bonds and depressed bank shares.

While the ECB is worried the Italian sell-off could spread to other countries in the euro zone, it will be keen not to be seen rewarding Rome’s fiscal excesses by offering support.

But Italy’s turmoil comes at an unfortunate time for the euro zone. Growth is already slowing, financial markets are increasingly volatile, the risk of a no-deal Brexit looms large and a global trade war may dent confidence further.

The German car industry’s struggles to adjust to new emissions standards could also dent third-quarter growth with reverberating effects for the wider economy.

Beyond the broader economic outlook, Draghi may also discuss tweaks to the ECB’s policy on reinvesting cash from maturing debt, particularly government debt bought as part of its Public Sector Purchase Programme (PSPP).

While that decision is also not expected until December, the ECB could decide on Thursday to emphasize that it will remain in the bond market for years to come, with enough firepower to smooth periods of stress.

Changes in reinvestments are expected to be mostly technical, to ensure smooth implementation of ECB policies as bonds often mature in large chunks.