ECB sticks to recovery exit plans despite gloomy prospects

FRANKFURT (Reuters) – The European Central Bank has kept its policy unchanged, as expected on Thursday, while maintaining an unprecedented recovery plan, even as growth prospects continue to darken and political turmoil in Italy weigh heavily on the monetary bloc.

After exhausting much of its firepower with years of support, the ECB has reaffirmed that its program of asset purchase worth 2.6 trillion euros ( $ 2.97 billion) would end this year and rates could rise after next summer. meeting since.

ECB chief executive Mario Draghi, however, is expected to acknowledge at his press conference at 12:30 GMT that growth prospects have deteriorated as internal and external factors weigh on confidence, which would give the political perspective from the bank a nuanced nuance.

Such a nuanced message is likely to keep expectations of future increases in relatively mild rates, as policymakers have advocated only minor and infrequent moves from the end of next year, as growth slows to its rate. natural potential after an exceptional year.

"The Governing Council expects the key interest rates of the ECB to remain at their current levels until at least the summer of 2019," the ECB said in a statement.

Investors will check whether Mr Draghi maintains the ECB's long-standing view that growth risks are broadly balanced, or acknowledges the deterioration of the outlook by highlighting the downside risks .

The problem is that investors might consider a change in risk assessment as an imminent sign of policy, and the ECB is not prepared for that.

Thus, even if the growth outlook deteriorated, Mr. Draghi could still call balanced risks, in part to prevent a change in expectations.

Policy makers, both public and private, have stated that the obstacles to extending the ECB's bond purchase regime are very high and it is too early to reassess the interest rate forecasts, which do not call for change until next summer.

Draghi is also expected to argue that inflation, the bank's main objective, is broadly on the same trajectory as the one discussed above, since reference prices may be higher due to higher oil prices. core inflation on the low side of expectations.

NO SUPPORT FOR ITALY

While the EU has taken the unprecedented decision to reject Italy's budget this week, Draghi should also be asked about the cost of escalating the political struggle between Rome and Brussels.

Draghi, himself an Italian, should repeat that no Member State can expect to benefit from the help of the ECB, especially those whose problems are caused by a breach of EU rules.

The clash with the EU has already cost Italy dearly because of higher borrowing costs as investors have dropped their bonds and shares.

While the ECB fears that Italian sales will spread to other eurozone countries, it will not want to be rewarded by Rome's budget surpluses by offering support.

But the Italian turmoil comes at an unfortunate moment for the eurozone. Growth is already slowing, financial markets are becoming more volatile, the risk of a Brexit without a transaction is imminent and a global trade war could undermine confidence.

The efforts of the German automotive industry to adapt to new emission standards could also weigh on growth in the third quarter and impact the economy as a whole.

Beyond the wider economic outlook, Draghi could also discuss changes to the ECB's policy of reinvesting liquidity from maturing debt, in particular public debt purchased under its program. Public Sector Procurement (PSPP).

Although this decision is not expected until December, the ECB could decide Thursday to stress that it will remain on the bond market for many years, with sufficient firepower to mitigate periods of tension.

The revisions to the reinvestments should be mainly technical in order to ensure the proper implementation of the ECB's policies, as bonds often mature.

($ 1 = 0.8768 euros)

(Corrects the dollar conversion for asset purchases from paragraph 2 to $ 2.97 billion (not $ 684.30 billion)

($ 1 = 0.8763 euros)