ECB under pressure amid anemic growth | Business| Economy and finance news from a German perspective | DW | 07.12.2016
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ECB under pressure amid anemic growth

The European Central Bank's governors are meeting Thursday to debate their future monetary policy. Recent developments in the US and Italy seem to suggest the lender may extend its already huge stimulus program.

It's show time again at the ECB's headquarters in Frankfurt, Germany. At a regular policy meeting, the guardian of the euro currency is to decide Thursday whether to extend its bond-buying stimulus program beyond the March 2017 deadline.

The majority of analysts expect exactly that to happen as the 19-member eurozone keeps being faced with weak economic growth and an inflation rate still far from the ECB's recommended target.

November's victory by Donald Trump in the US presidential election and the uncertainty generated by Sunday's referendum on constitutional reform in Italy might make such a decision all the more straightforward, the bulk of economists believes.

After all, Italian Prime Minister Matteo Renzi is resigning after a failed attempt to streamline decision-making in Rome, thus piling pressure on Italy's ailing banks. The third-largest lender in the nation, Monte dei Paschi di Siena, has been fighting an uphill battle to secure money to plug a black hole.

Clear stance

ECB President Mario Draghi has already indicated the central bank's future stance on stimulus measures will be clarified on Thursday on the basis of its own new inflation and growth forecasts.

Shopping in a supermarket (Fotolia/G. Sanders)

One of the ECB bond-buying program's objectives has been to crank up inflation, but low energy prices have prevented a faster recovery

Should the lender really decide to extend its massive bond purchases beyond March of next year, it will most likely prolong it for another six month; and it will most likely also provide a hint as to how the bank will bring the program to and end eventually in a bid to prepare markets in advance so as to avoid any shocks.

Some economists have already warned that while the ECB may want to extend its bond-buying activities, there may be not enough bonds to purchase anyway. But Trump's victory in the US has been followed by a global rise in bond yields, making more of them available for the Frankfurt-based bank.

Since early 2015, the ECB has been purchasing 80 billion euros ($86 billion) in bonds every month, with the main objective of keeping market borrowing rates low and boosting lending to both companies and private households.

Meager results?

Some might argue the success of this policy has been negligible. At 0.3 percent in the third quarter, the euro area's economic expansion is still anemic. True, unemployment has dropped across the eurozone, but inflation has risen only slightly.

Watch video 02:52

ECB chief Draghi faces German critics

In the year to November, consumer prices in the bloc nudged up to 0.6 percent. While that rate was the highest in two and a half years, it was still way below the ECB's target of just under 2 percent.

The president of the Munich-based Ifo economic institute, Clemens Fuest, argues, though, that the ECB shouldn't be worried about consumer prices too much. He sees inflation in the eurozone rising to 1.5 percent by March of next year, supported by higher energy prices.

Consequently, Fuest comes out in favor of tapering, that is reducing bond purchases after the March deadline. "The argument that the eurozone's inflation rate is too low will no longer be tenable in 2017," Fuest said in a statement.

hg/jd (Reuters, AP)


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