Eurozone bouyant forecasts to bring early Christmas cheer for ECB

ECB President Mario Draghi and European Commission President Jean-Claude Juncker [European Commission]

Positive new economic forecasts for the eurozone will bring early Christmas joy for the European Central Bank, but these will not be enough to coax Frankfurt from its mantra of confidence tempered with patience, analysts expect, with president Mario Draghi set to avoid talk of further reducing its massive support to the economy.

The bank’s quarterly growth and inflation forecasts could be in for their fifth upgrade in a row as governors gather in Frankfurt on Thursday (14 December), after the European Commission last month sharply lifted its predictions to a 2.2 percent expansion in 2017, the fastest pace in a decade.

Brussels predicts the 19-nation currency area will go on to add some 2.1% in 2018 and 1.9% in 2019.

Thursday will also bring the first look at the central bank’s growth and inflation expectations for 2020, which could offer the first glimpse of price growth finally reaching its goal.

While economic expansion has accelerated in recent months — notching up 0.6 percent quarter-on-quarter between July and September — inflation remains stubbornly short of the ECB target of just below 2.0%.

Policymakers agreed in October to slash the bank’s mass bond-buying from €60 billion per month to 30 billion from January, as signs of recovery in the single currency area multiplied.

Along with historic low interest rates and cheap loans to banks, government and corporate bond purchases are designed to pump cash through the financial system and into the real economy of businesses and households, powering economic growth and inflation.

But price growth in the 19-nation single currency area slowed slightly to 1.4% in October, according to figures released just after the ECB’s cutback in bond-buying.

Draghi warned at his last press conference that inflation would likely fall back over the winter, before recovering in early 2018.

“It is far from clear that the ECB’s previously stated conditions of a self-sustaining and widespread rise have been met,” Capital Economics analyst Jennifer McKeown pointed out.

Until inflation is obviously on track to meet the target most policymakers are loath to hint at further reducing their support to the economy or raising interest rates.

Doing so could boost the euro against other currencies, braking price growth by making imports cheaper and slowing economic growth by increasing prices for eurozone products abroad.

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On Thursday, Draghi “will be reluctant to give any signals about future monetary policy that might prompt the currency to rise sharply again” as it did after an unusually upbeat speech in June, McKeown said.

Inflation puzzle

Like other major central banks, the ECB has been frustrated by economic growth failing to haul inflation up in its wake.

Earlier this year, Draghi said that higher wages would be the “linchpin” of increased prices.

For now, upward pressure on pay is weak as there are still reserves of people unemployed or eager to move from part-time to full-time hours, limiting workers’ bargaining power.

Unemployment in the eurozone fell to 8.8% in October, its lowest level since January 2009.

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“The economic recovery is strong and stable and should remain so on a medium term horizon… slack on the labour market is decreasing” and brightening the outlook for inflation, Natixis bank economist Alain Lemagnen said.

Nevertheless, with closely-watched “core” inflation — excluding volatile food and energy prices — falling back in recent months, “an ‘ample’ degree of monetary accommodation is still warranted… recalibration should be gradual,” he added.

For Thursday’s meeting, new announcements will likely be limited to racking up more corporate bonds on the ECB’s shopping list, Capital Economics’ McKeown said, as the central bank approaches limits on how much government debt it is allowed to hold.

Meanwhile “the bank will continue to stress for some time yet that interest rates will be kept on hold until well after asset purchases have ended,” signalling a steady hand to financial markets, she added.