The European Central Bank (ECB) is widely expected to hold interest rates steady on Thursday with many market watchers expecting the bank to announce in September plans to reduce its bond-buying program.
ECB President Mario Draghi's speech in Sintra was interpreted by many economists as a sign that the central bank was more optimistic about the economy and could start "tapering" earlier than expected. Since his speech in June, the ECB has tried to calm down those expectations in order to prevent an unwanted tightening of monetary conditions.
"Our mission is not yet accomplished. We need patience and persistence. We need to be patient, because inflation convergence needs more time to show through convincingly in the data," the ECB's Chief Economist Peter Praet said in a speech July 6 in Paris. In the same speech, he also said that the recovery in the euro zone "seems to have gathered further momentum."
That's exactly the difficult situation the ECB is in: While economic growth is surprisingly strong with both hard data and also sentiment indicators pointing to a solid recovery, inflation is nowhere close to target of below but close to 2 percent. Headline inflation for June even declined slightly to 1.3 percent from 1.4 percent in May with core inflation though slightly increasing by 0.2 percentage points to 1.1 percent.
"The ECB will continue to face little home-made inflationary pressure," writes Carsten Brzeski, chief economist for Germany and Austria at ING-DiBa, in a note.
"If anything, the drop in oil prices, the pick-up in bond yields and the strengthening of the euro have further deteriorated the ECB's inflationary outlook."
The ECB clearly wants to prepare the markets for an exit of their ultra-loose monetary policy stance without creating further distortions in the markets.That's like a dance on a volcano given the nervousness of investors in currency and bond markets.
In Tallinn, at the ECB's last monetary policy meeting, Draghi said: "the ECB will be in the markets for a long time."
Source: Bloomberg Pro Terminal
Jr Trader Alexander Kumanov
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