Strong Euro May Deter Draghi From Tapering, For Now
September 06 2017 - 5:03AM
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The European Central Bank is set to adopt a highly cautious
stance Thursday regarding any gradual withdrawal of monetary
stimulus or "tapering," as a strong euro presents a tough conundrum
for rate-setters, who are already flummoxed by the Eurozone's weak
inflation amid solid growth.
The Governing Council, led by ECB President Mario Draghi, is
widely expected to keep all three of its interest rates unchanged
for a twelfth consecutive policy session and retain the EUR 60
billion monthly asset purchases that are set to run until the end
of the year.
Additionally, caution is likely to prevail at the post-decision
press conference as a possibly dovish Draghi navigates the
subtleties of central bank communication with his verbal
intervention tool to avoid feeding markets with hopes of an
imminent tapering that could further strengthen the euro and hurt
the euro area recovery.
"While a clear hint on tapering at this week's meeting could
send the euro even higher, potentially undermining the recovery,
room to postpone tapering is limited due to bond scarcity," ING
Bank economist Carsten Brzeski said.
He added, "Therefore, we expect Draghi to strike a cautious
balance between giving the first clear hint at upcoming tapering
and adopting a dovish tone in order to calm the FX market."
Economists widely expect an actual decision on tapering in
October. They also expect that a modest tapering would only start
in January after the end of the on-going round of asset
purchases.
Draghi will also unveil the latest ECB Staff economic
projections during the press conference. Economists widely expect a
further upgrade to the growth outlook but yet another trimming of
the inflation projections.
In the previous round in June, the bank projected euro area
growth at 1.9 percent this year, 1.8 percent next year and 1.7
percent in 2019. Inflation projections were cut to 1.5 percent for
this year, 1.3 percent next year and 1.6 percent in 2019.
Meanwhile, ECB policymakers were already worried about a
strengthening euro in July and pointed out the risk of the exchange
rate overshooting in the future, the minutes of the policy session
revealed. They also stressed that favorable financing conditions
are still supported by the massive stimulus.
The euro has strengthened robustly since late June, when
Draghi's comments in Sintra, Portugal, fed market expectations of
an imminent tapering and sent yields and the euro soaring.
That said, a stronger euro could be reason enough for the ECB to
delay its exit from the massive stimulus. Yet, the question remains
- "For how long?"
Some analysts expect the ECB to entirely wind down its massive
stimulus by the end of next year and start raising interest rates
modestly in 2019.
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