Steady hand at ECB as eurozone economy sparkles

Frankfurt am Main (AFP) –


European Central Bank policymakers left interest rates and massive support for the economy unchanged Thursday, as observers expected hefty upgrades to the bank's growth forecasts for the eurozone from president Mario Draghi.

The bank's quarterly growth and inflation forecasts could see their fifth hike in a row during Draghi's 2:30 pm (1330 GMT) press conference in Frankfurt, after central bank governors held their last meeting of 2017.

The EU's executive European Commission last month sharply lifted its predictions to a 2.2 percent expansion in 2017, the fastest pace in a decade.

Economic indicators are in the green, with a eurozone-wide purchasing managers' index -- widely used to gauge future growth -- beating forecasts Thursday with its best reading since early 2011.

Growth next year will achieve "a much higher rate than most economists expect," Commerzbank analyst Christoph Weil judged.

"More and more, the ECB's extremely expansionary monetary policy is feeding through to the real economy, and the external environment also remains favourable" with strong trade and global growth boosting Europe, he added.

Nevertheless, a sunny growth outlook alone will not be enough to sway Draghi from his mantra of confidence tempered with patience, analysts agree.

The ECB's rates decision falls on the same day as the Bank of England, which left its key interest rate unchanged at 0.50 percent as the British economy battles Brexit headwinds.

Meanwhile, the US Federal Reserve on Wednesday increased its key lending rate to 1.25-1.5 percent as the labour market heated up, although inflation remains elusive.

- Long and winding road -

While eurozone growth has accelerated in recent months -- racking up 0.6 percent quarter-on-quarter between July and September -- inflation remains stubbornly short of the ECB target of just below 2.0 percent.

Policymakers agreed in October to slash the bank's mass bond-buying from 60 billion euros ($71 billion) per month to 30 billion from January, as signs of recovery in the single currency area multiplied.

Along with historic low interest rates and cheap loans to banks, government and corporate bond purchases are designed to pump cash through the financial system and into the real economy of businesses and households, powering economic growth and inflation.

But price growth in the single currency zone hit just 1.5 percent in November.

Inflation is set to fall back over winter before recovering early next year, Draghi said at his last press conference in October.

A glimpse of price growth finally reaching its goal could come only in the bank's first published projections covering 2020, also released Thursday.

For now, "it is far from clear that the ECB's previously stated conditions of a self-sustaining and widespread rise have been met," Capital Economics analyst Jennifer McKeown pointed out.

And until inflation is obviously on track, most policymakers are loath to hint at further reducing their support to the economy or raising interest rates.

Doing so could boost the euro against other currencies, braking inflation by making imports cheaper and slowing economic growth by increasing prices for eurozone products abroad.

- Inflation puzzle -

Like other major central banks, the ECB has been frustrated by economic growth failing to haul inflation up in its wake.

Earlier this year, Draghi said that higher wages would be the "linchpin" of increased prices.

For now, upward pressure on pay is weak as there are still reserves of people unemployed or eager to move from part-time to full-time hours, limiting workers' bargaining power.

Unemployment in the eurozone fell to 8.8 percent in October, its lowest level since January 2009.

"The economic recovery is strong and stable and should remain so on a medium term horizon... slack on the labour market is decreasing" and brightening the outlook for inflation, Natixis bank economist Alain Lemagnen said.

Nevertheless, with closely-watched "core" inflation -- excluding volatile food and energy prices -- falling back in recent months, "an 'ample' degree of monetary accommodation is still warranted... recalibration should be gradual," he added.

For Thursday's meeting, new announcements will likely be limited to racking up more corporate bonds on the ECB's shopping list, Capital Economics' McKeown said, as the central bank approaches limits on how much government debt it is allowed to hold.

Meanwhile "the bank will continue to stress for some time yet that interest rates will be kept on hold until well after asset purchases have ended," signalling a steady hand to financial markets, she added.