Why Strong Growth Is a Headache for the European Central Bank

Why Strong Growth Is a Headache for the European Central Bank

Mario Draghi, the president of the European Central Bank, has what might be called a happy problem. The eurozone economy is performing better than anyone expected a few months ago. That’s reason to celebrate. But the vibrant growth is also upending assumptions about when the European Central Bank will need to act to keep inflation under control.

For Mr. Draghi, that’s an issue.

Managing investor expectations and avoiding undue market turmoil are among a central bank president’s most important tasks. Fast-changing economic data, along with mixed messages from members of the European Central Bank’s Governing Council, mean that the remarks Mr. Draghi gave in December — saying the central bank would continue stimulus measures at least through September and could even step them after that — already seem obsolete.

He will have a chance to update his message on Thursday. Mr. Draghi will hold a news conference after a meeting of the Governing Council, where his task will be to calm the cacophony of speculation and provide a measure of certainty about the bank’s intentions — all while keeping his options open in case circumstances change.

Investors and analysts will be listening closely for any changes in Mr. Draghi’s tone or language that hint at an end to the stimulus program, known as quantitative easing.

Here are some key phrases to listen for, adapted from a report this week by Carsten Brzeski, economist at ING Bank in Frankfurt.

Signals suggesting the central bank is in no hurry to put the brakes on the eurozone economy:

■ Inflation is expected to rise gradually.

■ Risks to growth are broadly balanced.

■ The increasing strength of the euro presents a risk to growth.

■ A majority on the Governing Council wants quantitative easing to remain open-ended.

Signals indicating the central bank may end its stimulus program after September:

■ Confidence is growing that inflation is getting close to the official target of 2 percent.

■ The eurozone recovery is improving.

■ The strength of the euro reflects economic fundamentals.

■ A significant number of Governing Council members no longer favor open-ended quantitative easing.

Since December, indicators of eurozone growth have steadily gotten stronger. Surveys of business and consumer confidence find them at their highest levels in more than a decade. Unemployment, at 8.7 percent, is at its lowest level since early 2009.

Now expectations are rising that the quantitative easing program, in which the European Central Bank creates new money and uses it to buy government and corporate bonds, will end after September. That would set the stage for the bank to begin raising its key interest rate, which is currently at zero, sometime in 2019.

These changing expectations are bringing some unwelcome side effects. In particular, the euro has gained against the dollar, as investors reckon they’ll be able to earn higher interest on the euro. But a strong euro also makes products manufactured in the 19-country eurozone more expensive abroad, which could hurt exports and ultimately create a drag on economic growth.

Most analysts expect Mr. Draghi to send a strong signal on Thursday that the European Central Bank will keep pumping money into the economy until there are unmistakable signs that inflation is getting close to the official target of below, but close to, 2 percent. But a growing number of Governing Council members have been agitating for a signal that the days of quantitative easing are numbered.

A majority on the 25-member Governing Council probably leans toward a gradual end to quantitative easing. But some members who are not usually considered hard-liners when it comes to inflation have lately been questioning whether it makes sense to prolong central bank stimulus.

Among them is Benoît Coeuré, one of six members of the Executive Board of the central bank, which oversees its operations. (The other 19 members of the Governing Council are the heads of the national central banks in the eurozone.) Mr. Coeuré has generally been seen as a proponent of quantitative easing.

Recently, though, Mr. Coeuré has sounded very bullish about the eurozone economy — a sign he may join those who think the bond-buying should be coming to an end. As one of the Governing Council’s most influential members, he could help tip the balance of power.

“The current economic expansion in the euro area is stronger than it has been for a decade,” Mr. Coeuré said in Bangkok last month, “and broader than for two decades.”


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