ECB eyes at baby step towards stimulus exit

European Stock Markets

The European Central Bank is all but certain to keep policy unchanged on Thursday but may tweak its communication stance to offer at least a few clues about its progress towards ending its unprecedented bond purchases later this year. 

Having revived euro zone growth with lavish stimulus, the ECB is now debating whether to step back and preserve its remaining firepower. But concerns over low inflation, a strong euro, rising political risk and recent market volatility are expected to prevail for now.

Having promised to review their communication stance in “early” 2018, however, and with asset purchases due to expire in September, policymakers are likely to give investors at least a few hints to prepare them for a broader revision of policy around the summer months, economists predicted.

The ECB announces its policy decision at 1245 GMT, followed by ECB President Mario Draghi’s news conference at 1330 GMT, which will also include a quarterly update of economic projections.

The dichotomy facing the ECB is that while growth has blown past expectations, inflation remains weak, having hit a 14-month low in February and staying well short of its target of almost 2 percent.

While the bloc’s five-year growth run and a rapid drop in unemployment suggest that inflation will eventually rise, its rebound is still months away, complicated by the euro’s rise against the dollar, which puts a lid on price growth.

The single currency was trading at $1.24 on Thursday, a touch below a three-year high hit last month.

Risks of a trade war with the United States, an inconclusive election in Italy and falling bank share prices could add to caution, economists predicted.

New economic projections are also not likely to trigger a bigger policy shift since they are expected to confirm earlier expectations, pointing to an eventual rise in inflation but still indicating a lack of convincing underlying price pressures.

The biggest change on the agenda is likely to be a proposal to drop the bank’s so-called easing bias, which stipulates that bond buys could be increased if needed.

While few if any actually expect purchase volumes to rise, such a tweak would suggest policymakers are increasingly confident that their 2.55 trillion bond buys could finally end this year after several extensions. 

For now, the ECB’s benchmark deposit rate will stay at minus 0.4 percent and monthly bond buys will continue at 30 billion euros per month.