ECB Policy Mantra Tested as Outlook Weakens: Decision Day Guide

(Bloomberg) -- The European Central Bank’s first meeting since the summer break will see policy makers dealing with a conundrum over the economy’s ability to face life after stimulus.

New growth forecasts are set to be tweaked lower as global trade tensions damp external demand, and the committee that compiles them for the Governing Council sees the risks as tilted to the downside, according to people familiar with the projections.

Read more on Thursday’s central-bank decisons

If President Mario Draghi intends to plow on with the plan to phase out asset purchases starting next month, as economists and investors expect, then he’ll need to explain why the confidence of policy makers remains intact.

ECB Policy Mantra Tested as Outlook Weakens: Decision Day Guide
What Our Economists Say
“Trade wars are bad for growth and the risks are starting to crystallize in some parts of the world. But let’s not forget how much progress the euro area has made in recent years. The recovery, by our estimates, is close to complete and the time for firefighting has passed.”

-- Jamie Murray and David Powell, Bloomberg Economics

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The ECB will announce its policy decision at 1:45 p.m. on Thursday in Frankfurt, and Draghi will hold a press conference 45 minutes later. Here’s a look at the topics he’ll probably be quizzed on.

Broadly Balanced

The 25-member Governing Council might disagree with the Monetary Policy Committee’s assessment and stick to language that the risks to growth are “broadly balanced.” That’s been its position for more than a year, and any change would likely jolt the market.

It could confirm that bond purchases will be halved to 15 billion euros ($17 billion) a month from October -- a step it currently “anticipates” taking -- while stressing that the plan to cap the program at the end of the year will depend on incoming data.

ECB Policy Mantra Tested as Outlook Weakens: Decision Day Guide

Draghi can argue that there’s no need to sound the alarm yet because consumer prices aren’t being hit. The ECB’s inflation forecasts will remain unchanged from the previous round, averaging 1.7 percent every year through 2020, the officials said. That’s still below the goal of just under 2 percent, but it may swing the debate.

Risk Ranking

The chief risks to the euro-area economy are outside the ECB’s control, though Draghi will likely be asked where he sees the greatest contagion threat.

ECB Policy Mantra Tested as Outlook Weakens: Decision Day Guide

There are reasons to be concerned. Industrial output and factory orders have stumbled in Germany, Europe’s biggest economy, and euro-area industrial production recorded its first annual drop in 18 months. The European Commission’s measure of economic confidence is the lowest in a year.

ECB Policy Mantra Tested as Outlook Weakens: Decision Day Guide

Italy

Italy, Draghi’s homeland and the euro zone’s third-biggest economy, stands at a crucial point as the populist government tries to square its costly election promises with a budget that’s supposed to stay within European Union rules. Investors have been spooked, with bond yields jumping and Fitch Ratings slapping the country with a negative outlook.

In the latest twist, Luigi Di Maio, one of two deputy prime ministers, renewed his push for a so-called citizen’s income and said the government would face “a serious problem” if it doesn’t deliver. Finance Minister Giovanni Tria has threatened to resign over the issue, according to newspaper La Stampa. Draghi is likely to be asked if the euro zone could withstand such a ruction.

Final Year

The ECB does have one technical, but important, decision to consider for 2019 -- the strategy for reinvesting the proceeds of maturing bonds.

On interest rates, the central bank will probably keep its guidance that they’ll stay at record lows “at least through the summer” of next year, and Draghi is unlikely to be more specific.

Economists foresee a rate increase by September 2019, just one month before Draghi’s eight-year term ends. With market expectations for a hike later in the year, he may become the first ECB president to leave without ever raising borrowing costs.

ECB Policy Mantra Tested as Outlook Weakens: Decision Day Guide

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