Login ID:
Password:
Partner Login
Contact Us : 7066511911

Five Questions for the European Central Bank's Meeting

26 Jul 2018 4:01 am
By Tom Fairless 

The European Central Bank is shifting its attention to an old-fashioned policy tool: interest rates.

No sooner had the bank moved last month to phase out its giant bond-buying program than officials were discussing the likely timing of an interest-rate increase, the ECB's first in more than seven years.

There is no rush. The ECB says it expects to wait at least a year before raising its key interest rate, currently at minus 0.4%. Still, investors are watching closely for clues because the timing affects a range of asset prices.

ECB President Mario Draghi is likely to face questions at a news conference from 12:30 GMT on the state of the eurozone economy and the bank's next policy steps. Here are some of the key issues:

How strong is the eurozone economy?

Growth in the currency bloc has slowed since the start of the year, albeit from a very rapid pace, and looks unlikely to pick up again soon. The ECB has blamed temporary factors such as cold winter weather, but the soft patch hasn't abated. Officials worried at their June meeting about the impact of economic threats ranging from increased protectionism to financial-market tensions, according to the minutes. Mr. Draghi might offer fresh insights into how worried officials are, and what it might take to delay a first interest-rate increase.

How will trade tensions affect Europe?

This is a key risk for the ECB. While the international trade conflict looks manageable so far, the eurozone's export-focused firms could be disproportionately hit by any escalation, such as U.S. tariffs on imported European cars. The threat alone has probably already hurt business sentiment and investment, analysts say. Mr. Draghi's views on the trade issue could be the most interesting take away from this week's meeting.

What is the risk of a currency war?

President Donald Trump's recent criticism of the Federal Reserve's decisions, and his censure of officials in Europe and China for weakening their currencies, raise the risk that politicians might seek to steer exchange rates. Many central bankers see such interventions as a dangerous encroachment on their independence. Mr. Draghi might use his news conference to rebuke Mr. Trump or remind the president of his international obligations.

When is summer?

Not for the first time, the ECB has triggered a debate on the seasons of the year. The bank signaled last month that it won't raise interest rates "through next summer," and analysts have been puzzling over exactly what that means. Many consider September 2019 to be the earliest date for an ECB rate increase. Mr. Draghi will probably be pressed on the issue, but is likely to remain vague. "We think that questions on the exact timing of the first rate increase will lead nowhere as the ECB wants to retain a sufficient degree of flexibility," said Oliver Rakau, chief German economist at Oxford Economics.

What about QE reinvestments?

The ECB has said very little about its plans to reinvest the proceeds of maturing QE bonds, even though that has become an increasingly significant tool to steer interest rates. Analysts expect that such reinvestments will continue for at least two or three years after quantitative easing ends, following the Fed's example. Mr. Draghi might be asked whether the ECB will mimic the U.S. central bank's step of selling short-term bonds for longer-dated assets, a move aimed at pushing down long-term borrowing costs to provide an extra boost to the economy.

Write to Tom Fairless at tom.fairless@wsj.com
 

(END) Dow Jones Newswires

July 26, 2018 00:01 ET (04:01 GMT)

Copyright (c) 2018 Dow Jones & Company, Inc.
Disclaimer
Top 5 Special Reports
USD/MYR
USD/CNY & USD/IDR
USD/ARS & USD/BRL
CRB Index & U.S. Dollar Index—
USD/INR (Nov. ’19) – Bullish Breakout Confirmed – Hold ...