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ECB to acknowledge weak growth but keep policy unchanged

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FRANKFURT: The European Central Bank is all but certain to keep policy unchanged on Thursday but may acknowledge a sharp slowdown in economic growth, raising the prospect of any further policy normalisation being delayed.


The ECB last month ended a landmark 2.6 trillion euro ($2.96 trillion) bond purchase scheme and maintained its guidance that an interest rate hike is likely late this year.


But growth appears weaker than thought just a few weeks ago, suggesting that its next move could even be an easing of policy rather than a tightening.


Germany, France and Italy, the euro zone’s biggest economies, barely grew in the fourth quarter and ECB President Mario Draghi has already acknowledged that the slowdown could be longer than expected, setting up the ECB for a dovish meeting.


With much of its firepower depleted, Draghi will use his few remaining tools sparingly, suggesting Thursday’s meeting will be more about words than action.


At most, Draghi could downgrade the bank’s economic assessment, arguing that growth risks are now tilted to the downside. He could also provide clues about new loans to banks, called Long-Term Refinancing Operations or LTROs, likely to come in the spring.


“Even if the balance of risks does not formally change, we would expect a sufficient shift in tone to signal the same thing,” Deutsche Bank said in a note to clients.


The problem with downgrading the risk assessment is that such a change in the bank’s guidance would naturally raise expectations of policy action.


But the ECB is not yet ready to tweak its stance, so any change in the guidance would risk creating an impression that policy is not in sync with policymakers’ assessment of the economy.


Draghi could also opt to stick with the bank’s December formulation that growth risks are still broadly balanced, even if they continue to shift to the downside.


“President Draghi will have to pull off a balancing act — accounting for the subdued cyclical trend in the euro zone while accentuating the underlying confidence of the monetary custodians in the economic outlook,” economists at DZ Bank said.


The ECB announces its policy decision at 12:45 GMT and Draghi will hold a news conference at 13:30 GMT. The problem is that a growth dip, seen as temporary just a few months ago, shows no sign of going away.


Manufacturing contracted near the end of 2018, export growth slowed and sentiment indicators are falling towards multi-year lows.


A predicted rise in underlying inflation has also failed to materialise and employment growth is slowing, a worrying sign for wages and inflation.


This suggests that the euro zone is now growing so inflationary pressures may take longer to build, testing the credibility of the ECB, which has undershot its price growth target since early 2013. — Reuters



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