Just six months ago, the EU's economy was too weak to contemplate what Mario Draghi dubbed "a high-class problem".
But today the European Central Bank president confronts just such a dilemma -–the question of how to respond to better than expected economic data when ultra-loose monetary policy has become a way of life.
After years of crises and stagnation, the surprise upturn in the euro zone economy has pushed the issue of reining in the ECB’s €60billion-a-month stimulus up the agenda.
The recovery has gained in strength and breadth as lower political risk, cheap credit, and a more relaxed attitude in Brussels towards public spending have helped boost growth, with unemployment falling to its lowest level in eight years.
The issue the ECB’s policymakers must confront when they meet in Tallinn on Thursday is whether the recovery is strong enough to manage without so much monetary stimulus – whether in the words of one, it has attained escape velocity.
Here’s what to look out for when the ECB makes its regular monetary policy announcement at 12:45pm UK time and during the press conference that will follow at 1.30pm.
Watching the words
The ECB’s quantitative easing programme is on track to rack up €2 trillion of asset purchases by year end. The bank has also cut interest rates to record lows, imposing a deposit rate of minus 0.4 per cent on some of the private bank reserves parked in its coffers.
The ECB has given no signal so far that it plans to alter either its QE programme for this year or interest rates during that time.
But hawks on the council could push for the bank to toughen up its language all the same, removing references in Mr Draghi’s talking points that commit the ECB to expanding QE and cutting rates in the unlikely event of an economic downturn.
Such tweaks might look inconsequential. But they would mark a step towards a more operative discussion – on whether to wind down the bond-buying programme next year. Some analysts expect the ECB to debate that issue – known as tapering – in September.
But it is not clear that Mr Draghi will agree to make such textual changes. He was notably dovish in a recent appearance at the European Parliament and price rises in the euro zone remain anaemic, with core inflation at 0.9 per cent and the headline rate at 1.4 per cent. That compares with an ECB target of just under 2 per cent.
Changing the narrative
The ECB’s hawkish camp, which includes the governing council’s German membership and board member Benoit Coeuré, has long argued that the council should tweak its message on the euro zone’s economic outlook.
What that would mean in practice is that the council would say the risks to growth are now “broadly balanced”, instead of tilted towards the downside. This too would mark a small step towards a debate on tapering QE. It is also a form of words that seems increasingly bolstered by the facts.
The debate will take place in Estonia, where the economy grew by 0.8 per cent between the final quarter of last year and the first three months of 2017. Inflation is the highest in the region at 3.6 per cent.
While Estonia is one of only a few parts of the region in danger of economic overheating, the recovery is looking stronger throughout the euro zone. Of the 19 members of the euroclub, only the Greek economy failed to grow in the first quarter of this year.
New forecasts
The June meeting will coincide with new forecasts for growth and inflation from the eurozone’s central banks.
Forecasts published in March indicated that growth would be 1.8 per cent this year, 1.7 per cent in 2018, and 1.6 per cent in 2019. Inflation was expected to hit 1.7 per cent this year, 1.6 per cent in 2018, and 1.7 per cent in 2019.
The June forecasts are likely to show slightly better growth, but worse news on inflation – that is, a lower rate.
Corporate bond controversy
The ECB is coming under increasing pressure from lawmakers to reveal more about their holdings of corporate bonds. Forty-four members of the European Parliament from across the EU have signed a letter to Mr Draghi calling on the region’s central bankers to release more information on their holdings of around €75 billion-worth of corporate debt.
Ramon Tremosa, one of the signatories, who has just been elected co-ordinator of the European Parliament's committee on economic and monetary affairs, said: "I don't see how the ECB can maintain the status quo without damaging its own credibility and creating suspicions of crony capitalism indirectly supported by monetary policy."
The MEPs want national central banks to follow the Bundesbank’s lead and publish the names of the companies whose bonds have been bought. They also want the central banks to say how much of each bond they have purchased.
The ECB president could face questions on how much he is willing to reveal.
Copyright The Financial Times Limited 2017
