Draghi’s 2020 Vision for Euro-Area Economy Is Key to QE Exit

When European Central Bank President Mario Draghi speaks on Thursday, a key element will be what the euro-area economy might look like after his term ends.

Draghi will cap the ECB’s final policy meeting of the year with a press conference where he’ll unveil updated economic projections that include the first estimates for 2020, shortly after he steps down. Investors will latch onto the outlook as a clue as to when policy makers might end their emergency stimulus measures.

Banks including Berenberg, UBS Group AG and Societe Generale SA predict economic-growth forecasts will be raised and the 2020 inflation outlook will be close to the ECB’s goal of just under 2 percent. That could allow policy makers to halt bond purchases in late 2018 before raising interest rates about six months later.

“Draghi would feel more comfortable as a central banker with some kind of normalization process having started before he leaves,” said Anatoli Annenkov, an economist at Societe Generale. “This has taken longer than expected, but everything else suggests we are on the right path. It’s just the bravery at this point to go the last mile.”

No dramatic changes are likely when the Governing Council announces its decision at 1:45 p.m. in Frankfurt though. Economists surveyed by Bloomberg expecting policy makers to reaffirm their plan to halve monthly asset purchases to 30 billion euros ($35 billion) from January, extend them to at least September, and keep interest rates at current levels until well after they stop. Draghi will speak 45 minutes later.

This week’s meeting comes amid a crowded 24 hours in global central banking. The U.S. Federal Reserve announced its third interest-rate increase of the year on Wednesday, China unexpectedly edged borrowing costs higher, and Norway’s central bank signaled that it may start raising interest rates earlier than previously.

The Bank of England left interest rates unchanged, moving into a holding pattern after November saw the first hike in a decade. The Swiss National Bank predicted inflation will exceed its mandate in late 2020, though it left borrowing costs at a record low said it won’t rush to raise them. Turkey raised rates by less than forecast.

Bolstered by ECB stimulus and a global economic recovery, the euro area has recorded 18 straight quarters of expansion since coming out of a double-dip recession, and sentiment surveys point to accelerating momentum.

The stellar performance has encouraged some policy makers to urge resolute action, with Bundesbank President Jens Weidmann and his Dutch counterpart Klaas Knot among those calling for a firm end-date for bond purchases. Some officials fretted at the previous meeting that without a clear deadline, investors might expect another extension.

Yet inflation has so far failed to follow the upturn. Consumer-price growth last month was 1.5 percent, and ECB projections in September showed the rate slowing next year before accelerating again to 1.5 percent in 2019. Core inflation, excluding energy and food, is stuck around 1 percent, and wages are struggling to pick up.

Nervous of the trend, the ECB has pledged to move as gradually as possible in withdrawing stimulus. The next change will probably be to its forward guidance, which currently ties the length of the bond-buying program to progress on inflation.

Draghi is likely to be quizzed on how he intends to shift the policy language to emphasize the overall accommodation provided by measures including negative interest rates and the reinvestment of maturing debt. Executive Board member Benoit Coeure has said he expects the link between bond buying and inflation to be loosened before September.

One risk is that officials might not have the luxury of moving as slowly as they want. At least six banks including Nomura International Plc and Barclays Plc predict rate hikes as soon as next year as inflation accelerates faster than expected and the prospect of financial-stability risks mount.

Even on the Executive Board, Yves Mersch has warned his colleagues that they should avoid making promises that extend too far into the future.

For the time being though, the ECB chief is likely to repeat his message that an unexpected inflation pickup would be a “high-class” problem.

“Draghi will be wary of creating a shift in expectations of an earlier end to stimulus,” said Nick Kounis, head of financial markets research at ABN Amro in Amsterdam, who predicts the 2020 inflation forecast will be “more or less” in line with the goal. “We therefore expect the ECB to emphasize that underlying inflationary pressures remain weak, and that it is still not confident that there has been a turning point.”
Source: Bloomberg