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Stormy economic horizon to give ECB pause

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Confronted by threats to economic growth and still-sluggish inflation the European Central Bank will likely temper expectations Thursday for a quick exit from its massive stimulus programme for the eurozone, analysts expect.

[FRANKFURT AM MAIN] Confronted by threats to economic growth and still-sluggish inflation the European Central Bank will likely temper expectations Thursday for a quick exit from its massive stimulus programme for the eurozone, analysts expect.

Governors are expected to keep interest rates at their historic lows and hew to a September expiry date for their 30-billion-euro (S$49 billion) per month "quantitative easing" (QE) bond-buying scheme.

Caution from Frankfurt is even more likely as policymakers dropped a promise that they could increase QE if the economy weakened again at their last meeting in early March, saying they had been encouraged by positive data.

"Downside risks have re-emerged over the past couple of months," analyst Frederik Ducrozet of Pictet bank noted, although "the ECB is unlikely to respond (with policy changes) unless those risks materialise", preferring to inch along its gradualist exit course.

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Since late last year, the euro has strengthened against the dollar as the economy gathers pace and financial markets anticipate future interest rate rises, potentially slowing growth and inflation in the eurozone.

The ECB's central price stability objective is inflation of just below 2.0 per cent.

But price growth stood at 1.3 per cent in March, and central bank forecasts call for it to reach just 1.7 per cent by 2020.

Meanwhile, President Donald Trump's strident "America First" policy has shaken companies and markets worldwide in recent weeks, as he vowed to slap tariffs on metals imports.

Before eurozone representatives secured a temporary reprieve, the threats raised the spectre of a tit-for-tat escalation that could yet undermine global trade.

French President Emmanuel Macron and German Chancellor Angela Merkel hope to fend off the danger with successive White House visits this week.

And there are signs a hoped-for grand bargain between Paris and Berlin on eurozone reform, which observers hoped would buttress the currency area after years of crisis, may not be reached quickly.

Given the hints of gloom, ECB President Mario Draghi "could still put more emphasis on the downside risks to growth" at his Thursday press conference, pushing back financial markets' expectations of an interest rate rise, Mr Ducrozet said.

HINTS OF SLOWDOWN

Lower interest rates and QE are designed to pump cash through the financial system and into lending to firms and households - powering economic growth and inflation.

But after a near-euphoric second half of 2017 lifted annual growth to its highest level since 2007 - an expansion of 2.3 per cent across the eurozone's 19 nations - there are hints fewer positive surprises may be in store this year.

A key survey of eurozone business activity, the purchasing managers' index, was unchanged in April at 55.2, data company IHS Markit said Monday.

The index has joined other indicators in losing some of the exuberance seen around the turn of the year, although the reading was above the 50-point mark that suggests economic expansion.

"The economy has shifted down a gear at the start of this year," Commerzbank analyst Christoph Weil commented, but "there is no need to fear a massive plunge in economic growth".

Both the ECB and the Washington-based International Monetary Fund have lifted their growth predictions for the eurozone to 2.4 per cent in 2018.

That means short of an economic disaster, "policy normalisation (away from QE and low rates) will be prudent, persistent, patient, gradual," Mr Ducrozet said, echoing some of Mr Draghi's favourite adjectives.

AFP