Greece, bond purchases to top agenda at ECB meeting

The European Central Bank, bolstered by the success of its controversial bond purchase programme, will pledge to keep it in place while downside risks to economic growth remain, analysts said.

The ECB’s decision-making governing council is scheduled to meet on Wednesday but is unlikely to announce any new policy moves, central bank watchers predicted.

Instead, analysts said they would be listening out for what president Mario Draghi has to say about the effectiveness of the programme so far and about the situation in Greece.

“At its June press conference, the ECB is unlikely to announce any major new policy measures and will argue that its past actions are already yielding results,» said Ben May of Oxford Economics.

In March, the ECB embarked on a programme of so-called quantitative easing or QE, buying up 1.14 trillion euros in assets — at a monthly rate of 60 billion euros per month — until September 2016.

The aim is to inject liquidity into the financial system and push up the eurozone’s chronically low rate of inflation.

Ramping up purchases

Executive board member Benoit Coeure caused a stir two weeks ago when he announced that the ECB could «frontload» — or temporarily ramp up — the purchases prior to the summer drop-off in liquidity.

“This has been interpreted by many in the markets as a statement of intent from the ECB to prevent yields from rising to levels that could threaten the still reasonably fragile economic recovery,» May said.

Draghi, probably satisfied by the impact of Coeure’s comments, could state that the change in plan was «merely a tweak for technical reasons,» the expert said.

But he was unlikely to rule out more frontloading if the ECB perceived it to be justified by the underlying macroeconomic backdrop, May argued.

According to the minutes of the governing council’s last meeting in April, while the central bank chiefs saw a case for «guarded optimism on the short to medium-term outlook for the euro area economy,» they still felt it was important «to remain cautious» given the prevailing economic headwinds.

Hence, there is no talk of scaling back QE just yet.

“Against this background, we expect Draghi to re-affirm… that the governing council intends to continue its asset purchases until the end of September 2016» or until there was a sustained adjustment in the path of inflation, said Jonathan Loynes of Capital Economics.

Hard line on Greece

Greece is likely to be the other key talking point at the meeting, given the absence of any agreement so far between Athens and its creditors, analysts said.

ECB chief Draghi attended a meeting of finance ministers and central bank governors of the so-called Group of Seven countries in Dresden last week, where the efforts to hammer out a deal and prevent a disastrous «Grexit» or Greek exit from the eurozone took centre stage.

“We suspect that Draghi and colleagues will maintain a hard line on Greece,» said Loynes.

The ECB will also publish Wednesday its latest updated forecasts for growth and inflation in the 19 countries that share the euro.

In early May, executive board member Yves Mersch suggested the forecasts might be raised, said Commerzbank economist Michael Schubert.

“But this is unlikely to occur, given the rather disappointing economic indicators, a higher assumed oil price and a first-quarter growth rate that may be slightly disappointing from the ECB’s perspective,» Schubert said.

The eurozone economy grew by 0.4 percent in the first three months of this year.

According to the ECB’s last projections published in March, eurozone growth was expected to reach 1.5 percent in 2015, 1.9 percent in 2016 and 2.1 percent in 2017.

“But even with its projections unchanged, the ECB is probably much too optimistic,» said Schubert.

“In consequence, we still expect that the ECB will not only fully implement its QE programme but also be more inclined in case of doubt to extend QE rather than tapering (or phasing it out) prematurely,» he concluded.


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