The European Central Bank (ECB) is expected to start laying the groundwork for stimulus reduction when policymakers meet on Thursday, Reuters reports.
However, due to concerns that strong signals could raise market volatility and undo the plans, policymakers, led by ECB chief Mario Draghi, are seen shifting their message only incrementally, the report said.
A bigger move could come in October or December, before the central bank’s 2.3 trillion euro bond purchase scheme expires at the end of the year.
In the ultimate decision over extending or winding down the purchases, Draghi will have to resolve a dilemma: euro zone economic growth is on its best run in a decade, yet inflation is weak and will miss the ECB’s target for years to come.
That raises questions about the central bank’s ability to fulfill its mandate of keeping inflation close to but below 2 percent, the report noted.
The relentless firming of the euro is only exacerbating this dichotomy, as a strong currency puts a natural lid on export prices and ultimately inflation.
But with growth exceeding expectations, unemployment falling fast and the threat of deflation long gone, some analysts say Draghi has few reasons to maintain what is essentially an emergency set up and that the main question is just how quick the exit should be.
The ECB is widely expected to bump up its 2018 growth forecasts on Thursday in what could be the fourth consecutive quarterly upgrade of the projection.
Analysts polled by Reuters predicted no policy change on Thursday but that bond buys, now running at 60 billion euros a month, will be cut by a third in a decision later this year.
The real question is how strongly policymakers should signal a shift that is now essentially expected by all investors. The ECB also needs to decide how to address the issue of the firming euro.
Draghi is seen certain to ask the ECB’s committees to prepare policy options for the coming meetings, a signal that has in the past preceded actions, the report said.
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