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ECB to play down Italy chaos and trade war fears


Frankfurt am Main (AFP)

Fears of a transatlantic trade war and political deadlock in Italy will not cloud European Central Bank optimism Thursday, analysts predict, but policymakers will remain tight-lipped about plans for winding down their massive support to the economy.

Markets have this week nervously eyed a populist surge in the eurozone's third economy and barbs flung between Washington and Brussels.

ECB President Mario Draghi is unlikely to rock the boat further with talk of higher interest rates or cuts to the bank's "quantitative easing" bond-buying programme.

Observers see the ECB on the way out of its mass bond-buying scheme, after it halved purchases of government and corporate debt to some 30 billion euros ($37 billion) per month from January this year.

Along with historic low interest rates, bond-buying was designed to stoke economic growth by pumping cash through the financial system, helping boost inflation to the ECB's target of just below 2.0 percent -- seen as most favourable for long-term growth.

But while GDP expansion in the 19-nation single currency area surged to 2.3 percent last year, price growth has not picked up in step.

In December, ECB forecasts called for inflation to hit 1.7 percent by 2020 -- still slightly short of its goal.

Indicators like business confidence, unemployment and credit growth "have been consistent with the ECB's positive assessment" for expansion of 2.3 percent this year and 1.9 percent in 2019, economist Frederik Ducrozet of Pictet bank noted.

Nevertheless, "notwithstanding the ECB's rising confidence, the staff projections for inflation are likely to remain stable in March," Ducrozet added.

- Boardroom battle -

Steady forecasts will not quell discord on the ECB's 25-strong governing council, made up of the executive board and governors from the 19 member states' central banks.

Minutes from January's meeting showed policymakers who favour dismantling bond-buying faster in light of stronger growth are increasingly vocal.

They were boosted last month when board member Benoit Coeure judged that "in future, the eurosystem (of the ECB plus the national central banks) can retreat as a buyer" without unravelling easier financing conditions.

"The end of QE is getting closer. The risk of deflation is clearly behind us and the only question is how to moderate and implement this exit," analyst Carsten Brzeski of ING Diba bank said.

But so-called "hawks" remain outvoted by "doves": governors who think the ECB should keep fuelling the recovery until it is certain of reaching its inflation goal.

Compromise to achieve a unanimous decision could produce "another cautious and very subtle step towards the QE exit," Brzeski predicted.

The ECB may not risk removing language that promises more bond-buying if the economy takes a turn for the worse from its "forward guidance" policy statement.

Instead, it could stress its ability to respond to shocks with a range of different tools.

- Italian conundrum -

A slump in global stock markets in recent weeks "should not have impacted the ECB's assessment" of the economy, Brzeski judged, noting it had a "small impact" on eurozone confidence.

Markets have suffered further over President Donald Trump's vow to slap tariffs on steel and aluminium imports into the United States, sparking the departure of his top economic advisor Gary Cohn and promises of countermeasures from the European Union.

Taken to extremes, a border tax duel could threaten growth and undermine inflation.

The threat could prompt Draghi to repeat his August 2017 warning that "a turn towards protectionism would pose a serious risk" for global economic growth, following up a January rap on the US' knuckles for appearing to talk down the dollar against the euro.

Meanwhile, Sunday's elections in Italy produced an unclear result that will make forming a government for the eurozone's third-largest economy difficult, with the parties that made the biggest gains promising lower taxes and higher social benefits.

That makes it less likely they will heed Draghi's longstanding call to reform and cut debts and deficits while the sun shines.

The Italian ECB chief may also find himself forced to defend his job, if journalists confront him with right-wing League party leader Matteo Salvini's Monday declaration that "the common currency system is bound to come to an end".

"The euro is irrevocable," Draghi insisted last year in a testy exchange with an Italian member of the European Parliament on a similar line of questioning.

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