Economics Diary

Posted on September 4, 2016

The headquarters of the European Central Bank©AFP

The headquarters of the European Central Bank

The focus on Thursday will turn to Frankfurt, where the eurozone’s monetary guardians are meeting to decide if they need to unleash more stimulus to boost the single currency area’s economy.

European Central Bank watchers are split on whether policymakers on the central bank’s governing council will act as soon as this week, or hold back now in case conditions worsen later in the year.

    The recent economic numbers suggest the economy here has managed to emerge from the aftermath of the UK’s decision to quit ties with the EU relatively unscathed. Closely-watched polls of purchasing managers, which gauge the direction of economic activity in the region, have remained close to their pre-Brexit levels in the months following the vote. The ECB could, therefore, decide to hold fire.

    But there are signs that the region’s economy remains vulnerable and that growth could falter in the coming months. And the headline measure for inflation remains worryingly low at just 0.2 per cent — well below the ECB’s target of below but close to 2 per cent.

    If the ECB decides to act, options include an extension of the quantitative easing programme beyond the spring 2017. At the moment, the central bank has said it will buy €80bn of government bonds a month until next March.

    The central bank could also ease the rules governing which sorts of government and private sector debt it can purchase for QE, soothing fears that the ECB will run out of suitable bonds to buy.

    Poland’s monetary council meets

    Poland’s central bank will hold its regular monetary policy council meeting on Tuesday amid rising expectation that a rate cut may be imminent in central Europe’s biggest economy.

    Weaker than expected data on investment activity released last month and a cut to official economic growth projections have increased speculation that the National Bank of Poland may move to reduce rates, as the government pushes for faster growth and the bank continues its efforts to tackle stubborn deflation.

    Most economists are still expecting the main interest rate to remain unchanged at an all-time low of 1.5 per cent at the meeting, with the majority forecasting a cut in the second half of next year.

    Still, minutes from the last meeting of the council, in July, detailed support for near-term easing. Rates have not changed since March last year.

    “Certain Council members suggested that an interest-rate cut might be justified already in the following quarters . . . They argued that the interest rate on corporate and household loans remained high in comparison with other European countries, and its reduction . . . would be conducive to higher GDP growth,” the minutes described.

    Last month Warsaw cut its economic growth forecast for 2016 to 3.4 per cent, from 3.8 per cent previously, below the ruling Law and Justice party’s target of 5 per cent.

    Data last week showed investment in Poland in the second quarter of 2016 fell by the largest amount for almost four years, as EU funding slowed and political instability saw companies hesitate with spending.

    Investment in the EU’s sixth-largest economy fell by 4.9 per cent from a year previously, against a 1.8 per cent in the first quarter of the year.

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