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ECB to hold firm through trade war fears

Trade and currency war fears won't lead the ECB off course, at least for now, analysts say
Trade and currency war fears won't lead the ECB off course, at least for now, analysts say AFP

Frankfurt am Main (AFP)

European Central Bank governors meet Thursday in the shadow of a looming transatlantic trade war, which may shade the institution's outlook but is unlikely to discourage it from ending massive stimulus for the eurozone come December.

The gathering comes a day after European Commission President Jean-Claude Juncker met US President Donald Trump in Washington after a tit-for-tat round of tariffs from Washington and Brussels.

Following their talks, the pair announced a series of joint steps Wednesday to defuse the escalating row between the two trading blocs.

Declaring a "new phase" in relations, Trump said the US and EU agreed to "work together toward zero tariffs" on non-auto industrial goods, while the EU would import more American natural gas and soybeans.

Both men also said they would hold off on any new tariffs while negotiations continued.

ECB President Mario Draghi has repeatedly warned that "downside risks to the (economic) outlook mainly relate to the threat of increased protectionism", and will likely reiterate the warning when he appears before journalists at 1230 GMT.

He may also address Trump's Twitter allegation last week that "China, the European Union and others have been manipulating their currencies and interest rates lower... taking away our big competitive edge".

"Draghi will likely have pointed responses, since we know he's sensitive about questions relating to central bank independence and G20 commitments, especially on avoiding manipulation of currencies," one ECB watcher at a major European bank told AFP.

- 'A long way to go' -

Away from the White House fireworks, Draghi's "main focus... will be on cementing the message from June" that the bank is withdrawing its support in response to the strength of the economy and its confidence it will eventually meet its inflation target, economist Carsten Brzeski of ING Diba bank predicted.

The Italian banker surprised observers last month by announcing the ECB will slash monthly purchases of government and corporate bonds from 30 billion euros ($35 billion) to 15 billion from October, before ending them at the end of the year.

Alongside ultra-low interest rates, bond-buying or quantitative easing (QE) was designed to pump cash through the financial system and into the real economy, stoking growth and in turn powering inflation towards the central bank's 2.0 percent price stability target.

After more than three years and some 2.4 trillion euros of QE, eurozone inflation hit 2.0 percent in June after 1.9 percent in May.

But with their eyes on meeting the target over the medium term, ECB policymakers are unlikely to budge from plans to leave interest rates at their historic lows -- the other pillar of its support to the economy -- until at least summer next year.

The latest ECB projections see annual inflation hovering at 1.7 percent between this year and 2020 -- meaning "the ECB still has a long way to go, to say the least", Brzeski said.

- Wiggle room -

Having scheduled the exit from QE for December and leaving interest rates at historic lows until long after that, "there isn't much traditional ammunition in the ECB's arsenal should a slow-down occur" that might risk inflation, economist Eric Nielsen of Unicredit noted.

Concern is all the greater as the outlook is clouded by the potential trade war and a lingering first-quarter slowdown, from 0.7 percent growth in October to December to just 0.4 between January and March.

But central bankers were careful to leave themselves some wiggle room when announcing their withdrawal from bond-buying.

Draghi declared the move "subject to incoming data" at June's press conference -- giving himself cover to extend the programme further if the eurozone economy suffers any fresh blows.

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