Tough task ahead for ECB

The European Central Bank’s (ECB) decision-making governing council will on Thursday, a month after the Brexit, assess market turmoil shock triggered by the Leave vote. Though volatility has subsided, it is widely believed that the extent of economic damage is still unclear.
ECB President Mario Draghi and his colleagues look forward to an uphill task to decide what to do with a bond-buying plan that is already set to exceed 1.7 trillion euro and run until March. After that, they have two options: Extending the deadline at the current pace of 80 billion euros a month or gradually
winding down, or tapering purchases.
Draghi will reiterate his demand for governments to do more to boost the euro zone’s economy in light of the Brexit, and weaker global growth that threatens the bloc’s fragile recovery. But this call may be unheeded again.
There are signs that the ECB is not expected to change its monetary stance on Thursday, as it is widely expected to hold fire on monetary policy next week. Yet, it will likely prepare the ground for more stimulus measures in September as the economic repercussions for the eurozone from Brexit becomes more clear.
When the ECB meets, traders are expecting policy makers to maintain a stimulus bias, as any rally in the euro could sink the already feeble growth outlook on the continent.
While the Bank of England signalled on July 14 it may inject fresh stimulus next month. The fallout from Brexit forecast will trim gross domestic product in the euro area next year and in 2018 by 59 billion euros ($66 billion) of lost output, according to economists.
In the event of an unexpected global shock, the euro’s reputation as a haven could spur demand, upending the central bank’s growth and inflation forecasts.
The 19-nation shared currency has traded in a tight range after plunging with the pound in reaction to Brexit. The referendum throws up more challenges for Draghi and his team.
Inflation in the euro area continues to be “too low” and the ECB’s “key objective is to ensure it reaches its goal of just below 2 percent”, ECB Governing Council member Luis Maria Linde has reportedly said. It is to be seen what steps ECB adopts for the purpose.
The euro is projected to weaken to $1.08 by the end of the third quarter,
according to the median estimate in a Bloomberg survey of analysts.
After inflicting the biggest weekly decline in German 10-year government securities this year, bond bears may have reason to pause as the ECB prepares to provide its analysis. This analysis will be crucial for the European markets, which is reeling from uncertainty.
Draghi will also to try assuage concerns about Italian banks, which are seen as particularly vulnerable to any downturn due to their 360 billion euro ($400 billion) credit.
The ECB will hold ground on negative rates that have helped banks lower their funding costs, generated capital gains on bond holdings, and reduced bad loans. It is the right balance.