The European Central Bank (ECB) is likely to raise its growth forecasts when it meets Thursday, as the fragile economic recovery in the region slowly gathers pace.
At the last meeting, he revealed the big roadmap for the ECB’s monetary policy until September 2018. This week, he’ll likely speak on an upward revision of the ECB’s growth outlook. But more details on how the ECB plans to unwind its QE (quantitative easing) program will likely be scarce, and won’t be expected in full until June or July.
“We expect Draghi to reconfirm the main messages from the October meeting,” said Carsten Brzeski chief economist for Germany and Austria with ING Diba, in a research note.
“With some upward revision for euro zone growth for this year and next, the ECB should join the growing choir of euro zone optimists,” he added.
Draghi’s main messages are that a) policy rates will remain at current levels “well past” the horizon of its current net asset purchases, b) QE could continue beyond September 2018 if a “sustained adjustment in the path of inflation consistent with its inflation aim” is not achieved and c) the ECB could still do more QE if the macro outlook “becomes less favorable” or financial conditions “become inconsistent with further progress towards a sustained adjustment in the path of inflation.”
There are no changes expected to the above working, as the somewhat dovish bias has still a majority in the ECB’s Governing Council. Despite that, the majority of economists polled by Reuters expect the ECB to reduce its asset purchase program to zero by December 2018, which would allow the ECB to lift rates sometime in 2019. This means that rate hikes will only come after the end of the program, reinvestments though — where the central bank reinvests the proceeds it gets from buying bonds — will continue.
In the meantime, the fragile economic recovery in the region will likely gather pace with recent economic data suggesting a strong 2018.
“No-one would be overly surprised if we would again slightly revise upwards our projections for growth,” Governing Council Member Yves Mersch said in an interview with CNBC last month.
He added that the inflation drop, projected for the end of this year and the beginning of next year, would be “less pronounced” as first feared. Meaning, the euro zone economy could well enjoy a bumper year while ECB’s policy remains very loose and accommodative.
“We see risks to the ECB’s cautiousness, not necessarily from higher inflation, but from getting the timing wrong in terms of boosting asset prices at a late stage of the economic cycle and depleting its ammunition,” Societe Generale’s ECB watcher Anatoli Annenkov said in a note.
ECB set to lift its growth outlook as massive bond-buying slowly winds down