ECB won’t vow much at Vienna meeting

Rising oil prices may give the European Central Bank (ECB) a rare opportunity to revise upwards its price growth forecasts when it meets on Thursday. Brent and WTI crude oil topped $50 per barrel on Thursday and remained above $49 on Friday. However, overall inflation remains very low and the euro area slipped back into deflation in April, with prices declining on the year by 0.2 percent.
“We expect both the inflation and growth projections to be revised upward. That is going to be the focus in Thursday’s meeting,” said Johannes Gareis, an economist at Natixis in Frankfurt. “The ECB will stress the importance of QE now that you can actually see some positive effects in the data.”
Given this scenario, ECB officials meeting in Vienna are expected to keep their ultra-loose policy unchanged again after they expanded quantitative easing by a third to 80 billion euros ($89 billion) in March and cut the deposit rate further below zero.
An index of executive and consumer sentiment increased to 104.7 from a revised 104.0 in April, the European Commission in Brussels said on Monday. Yet an upbeat tone on inflation will risk alarming investors, as markets have become used to the ECB needing to dump stimuli onto the euro area
economy.
The ECB has yet to unleash two more stimulus measures – purchases of corporate debt and cheap loans to banks announced at its March policy meeting. Combined with the rising oil price, central bankers are unlikely to unveil any new tools next week.
Indeed, the increase in the inflation projection will be the first since the ECB began quantitative easing in early 2015. It comes after the cost of a single barrel of Brent rose about $50 this week.
“We think the key challenge for ECB President Mario Draghi will be to not appear too hawkish amid rising oil prices and robust euro zone (first quarter) GDP (gross domestic product) growth,” UBS pointed out.
On Wednesday, Fitch Ratings increased its growth forecast for the euro zone by 0.1 percent to 1.6 percent. It said household spending was supported in the 19-country currency union by labour market improvements, continued growth in bank credit — and low headline inflation.
In March, the ECB forecast euro-area growth of 1.4 percent this year, 1.7 percent in 2017 and 1.8 percent in 2018, with inflation of 0.1 percent, 1.3 percent and 1.6 percent, respectively. There could be slight changes in these
projections.
After ECB staff lowered their euro-area inflation projections in each of their last three quarterly forecasting rounds, just 9 percent of economists surveyed predict a cut for the 2016 and 2018 calculations at this week’s meeting. Eleven percent see a lower 2017 prediction.
This could all help lift the ECB’s previous projections, published in March, which foresaw inflation averaging 0.1 percent in 2016, 1.3 percent in 2017 and 1.6 percent in 2018.
Meanwhile, a gauge of euro-area economic confidence rose for a second month in May to a four-month high, data from the European Commission in Brussels showed on Monday.
The ECB meeting comes amid growing concern among investors that central banks have run out of ways to bolster week prices. Before the meeting, fresh data should give officials more insight into how well the existing
stimulus is working to reassure the investors.
Achieving the inflation goal anytime soon remains a bit difficult target. Core inflation, which the ECB says is a gauge for future price developments, slowed to 0.7 percent in April and is seen barely, picking up to 0.8 percent in May.
ECB meeting may probably reaffirm the central bank’s commitment to take new measures if necessary, as it is unlikely to make any new pledges for now.