FRANKFURT”•The European Central Bank is widely expected to prolong massive monetary stimulus Thursday as the election of Donald Trump and fears for heavyweight member Italy rattle the eurozone.
Most analysts predict president Mario Draghi will extend an 80-billion-euro ($86-billion) per month bond-buying scheme beyond the current March deadline at his press conference.
Along with cheap loans to banks and record-low interest rates, ECB policymakers see the quantitative easing program as critical to supporting a sluggish recovery and pushing up inflation in the eurozone.
But while euro area inflation hit a two-and-a-half-year high in November at 0.6 percent, it remains far short of the central bank’s target of just below 2.0 percent.
Meanwhile, economic activity in the eurozone could suffer if US President-elect Donald Trump implements protectionist promises made on the campaign trail.
And the 28-country European Union has worries of its own, with Britain headed for the exit door, Italy destabilized by the resignation of Prime Minister Matteo Renzi, and elections in the key eurozone economies of France and Germany next year.
“Among elevated political risks with potential financial implications… the ECB will want to tread carefully,” analyst Holger Schmieding of Berenberg Bank wrote.
Against this background, the ECB is unlikely to begin “tapering” (winding down) its asset purchases just yet, he argued, preferring to keep them going for at least a few more months.
Extending QE on Thursday may be the last hurrah for the expansionary monetary policy that has marked Draghi’s term in office.
Some ECB policymakers have hinted that with forecasts showing inflation rising steadily into 2018 it is time the stimulus was withdrawn.
“How long a chosen monetary policy course is held must exclusively be determined by what’s necessary to ensure price stability,” Jens Weidmann, head of Germany’s Bundesbank (central bank) and ECB board member said in Munich on Monday.
Banks regularly grumble that low interest rates are hurting their business, and influential German economists have repeated calls in recent weeks for the ECB to end its bond-buying.
Draghi has so far resisted any such talk, insisting after October’s council meeting that tapering had not even been discussed.
A Bloomberg News report that QE might be on the way out troubled bond markets in early October.
This time around, Draghi may “drop a somewhat clearer hint than before that tapering may start” once any extension has run its course, Berenberg’s Schmieding said.
