ECB to stay on hold but highlight growth risks

 ECB to stay on hold but highlight growth risks

By Balazs Koranyi and Francesco Canepa

FRANKFURT (Reuters) - The European Central Bank is all but certain to keep policy on hold on Thursday, arguing that the risks from an amplifying global trade conflict don't warrant a deviation from its plan to gently exit its easy-money policy of the last few years.

With inflation rebounding and employment at a record high, the ECB decided last month to end its 2.6 trillion euro ($3.0 trillion) bond buying scheme by the close of the year, taking its biggest step yet towards removing the stimulus credited with dragging the euro zone out of years of stagnation.

Still, with growth slowing and sentiment weighed down by a slowly escalating trade war, the ECB also promised record low interest rates at least through next summer. That suggested it would wean the euro area off its stimulus by the smallest of increments, for fear that even a small amount of turbulence could derail the recovery in inflation.

Keen not to upset market expectations for a late 2019 rate hike, ECB President Mario Draghi is likely to argue that little has changed since the June meeting, even if recent growth indicators point to a persistent slowdown.

"In the near term, our sense is that downside risks have intensified," Morgan Stanley said in a note to clients.

Indeed, the composite PMI indicator dipped in June, consumer confidence eased and the German IFO business climate index for July fell - all pointing to a persistent slowdown that could force the ECB in September to once again lower its growth projections.

But the pace of expansion is still above what is seen as the bloc's potential growth rate, so the ECB can argue that the euro zone will continue to create jobs and eventually generate inflation, the bank's ultimate aim. It targets price growth just below 2 percent.

"As long as the trade tensions do not escalate into an outright trade war, we see no reason for the ECB to change its June guidance," Berenberg economist Florian Hense said.

The bank's interest rate decision is due at 1145 GMT, followed by Draghi's 1230 GMT news conference.

While it is unlikely to make any firm decisions, the ECB could still discuss another tweak to its guidance and revising the rules on how it invests cash from maturing bonds.

In June, the ECB said it "anticipates" that bond buys will end in December, a phrasing that could be firmed up to signal increased confidence in the June decision.

Still, such a move is not seen as necessary because the markets have fully priced in the end of the bond buying this year, and the bar for another extension is seen as exceptionally high.

Draghi is also likely to avoid providing a more precise timing for the first rate hike, sticking with the ECB's wording for steady rates "through the summer" of 2019.

With fresh buying due to end this year, the reinvestment of cash from expiring bonds will become a more significant policy tool, and Draghi has said that updated rules on how to spend this cash are likely to come in the coming months.

A key challenge is that the remaining maturity of the bond pile declines over time, so the ECB will have to decide whether to target longer-dated bonds or to accept the natural ageing of its portfolio.

Another option on the table may be to increase the ECB's flexibility in reinvestments as current rules on the timing of buys could tie the bank's hands too much, forcing it to make large purchases in a given market when smoother buys would be more appropriate.

($1 = 0.8563 euros)

(Reporting by Balazs Koranyi; Editing by Hugh Lawson)

This story has not been edited by Firstpost staff and is generated by auto-feed.

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Updated Date: Jul 26, 2018 04:05:25 IST