Economics: ECB sticks to stimulus exit plans despite darker outlook

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 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 nevertheless acknowledged in his press conference that the growth outlook has worsened as both domestic and external factors weigh on confidence, though again saying that the risks to the Eurozone economy remain broadly balanced.

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.

In our view, Draghi is a cautious man, who would rather be safe than sorry, and as such won’t want to repeat the mistake of his predecessor Jean-Claude Trichet and raise rates too early. He will forever want to be remembered for that July 2012 speech in London of “doing whatever it takes to save the euro”, which he duly delivered on, rather than for again prematurely hiking rates and causing another downturn.

Therefore, we wouldn’t be at all surprised to see the Italian ending his eight-year term as president, on October 31, 2019, without having overseen a rate-increase.

Alan McQuaid (26/10/18)
Economist