Frankfurt - The European Central Bank (ECB) faces a delicate balancing act at its policy meeting this week as the nascent recovery in the crisis-stricken euro zone remains extremely vulnerable to setbacks.
The ECB is not expected to unveil any policy changes at its regular monthly meeting on Thursday, but central bank president Mario Draghi will have to tread carefully if the positive effects of the most recent measures are not to evaporate, analysts argue.
Sentiment indicators are pointing upwards and hard data is starting to come in better than expected.
At the same time, “effects of the [ECB’s] forward guidance seem to be fizzling out a good two months after its introduction,” Commerzbank economist Michael Schubert said.
UniCredit economist Marco Valli agreed. “This mix of better growth data and higher money market future rates puts Draghi in a tricky situation where a careful balancing act is needed.
“On the one hand, recent growth news justifies a slightly more constructive tone” than at the bank’s meeting last month, Valli said.
“On the other hand, Draghi will need to retain an easing bias consistent with forward guidance outlined in July in order to bring money market expectations more in line with the ECB’s own assessment of economic fundamentals.”
Two months ago, Draghi ushered in what many ECB watchers saw as a revolution in communication policy by pledging to keep interest rates at historical lows – or even lower – for an extended period.
Never before had the ECB issued such “forward guidance”. Financial markets have been spooked by speculation that the ECB could follow the US Federal Reserve and start winding down its ultra-loose monetary policy. – Sapa-AFP