12:54 GMT13 April 2021
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    The European Central Bank (ECB) is expected to stop buying corporate bonds and pumping money into the bloc’s economy by the end of this year. However, a combination of political, geostrategic, and trade risks could derail the ECB’s effort.

    Kristian Rouz — Several top economists say the European Central Bank (ECB) will end its unconventional monetary policies — known as quantitative easing (QE) — this year, although some aspects of QE could be extended into 2019.

    According to a recent Reuters poll, the ECB will gradually wrap up its program of buying corporate bonds, while maintaining a combination of negative and zero interest rate programs, known as NIRP and ZIRP.

    The ECB is currently buying 30 bln euros worth of private-sector bonds per month to pump money into the economy, as it seeks to support lending and overall economic activity.

    "The ECB made clear that under reasonable assumptions, the QE will stop after December 2018," Louis Harreau of CA CIB said.

    The total amount of assets purchased by the ECB during the post-crisis recovery has amounted to some 2.55 trln euros ($3 trln).

    According to the poll, 58 economists out of 90 questioned said they expect the ECB to pursue a low-rick strategy, without extending the QE in its current form into the next year. The economists also said they expect the Eurozone economy to grow 2.2 percent this year, a downward revision from the 2.3-percent forecast in last month's poll.

    "The QE program was launched at a time when the Eurozone as a whole was at risk of deflation: a risk that is no longer anywhere on the ECB's radar," analysts of Intesa Sanpaolo said in a research note.

    Market participants say the ECB is seeking to tighten the monetary conditions in the 19-country single currency bloc in order to prevent possible capital flight. The US Federal Reserve and the Bank of England (BOE) have gradually tightened their respective monetary policies, pushing bond yields and borrowing costs higher.

    Tighter central bank policies typically contribute to an improvement in investment appeal within the given economy, as returns on investments (ROIs) are higher in a higher-interest-rate environment.

    ECB policymakers have voiced concerns that international investors might opt to allocate their capital to the higher-yielding US and UK economies — a consideration, forcing the ECB to consider a monetary tightening of its own.

    However, the ECB is not expected to move interest rates anytime soon, as it seeks a smooth transition from the accommodative policies characteristic of the extended post-crisis recovery.

    "We continue to believe that the ECB will seek to abandon its negative interest rate policy by the end of 2019 or early 2020," Intesa Sanpaolo experts wrote. "The risk of a slowdown of the global economy in 2020 is by no means negligible, and the ECB will want to cut out a margin of flexibility in the event of negative fallout for the euro zone economy."

    Economists who were polled by Reuters also pointed to the heightened political risks coming from Italy, where the right-wing coalition of the League Party and Five Star Movement might seek to exit the EU in an Itexit scenario. Additionally, global trade woes have added to the pessimistic assessments of the prospects for the Eurozone's economy.

    Over 60 percent of economists polled by Reuters said the ECB would hike its deposit rate in the third quarter of 2019, and the refi rate by the fourth quarter of next year.

    "We believe the ECB may be in a hurry to close the QE chapter," Bank of America Merrill Lynch analysts wrote in a note. "We think this is essentially political, as the ECB would not want its monetary policy to be affected by claims of supporting or conversely impairing the new policy course in Italy."

    Some experts have noted a possible economic slowdown, stemming from the ongoing realignment in international trade, could derail the ECB's effort to tighten monetary policies. The exports-reliant Eurozone economy could suddenly slow down next year, which would not support the case for either rate hikes or ending the QE.

    Such concerns come on the heels of a report saying that Eurozone manufacturing expansion dropped to its weakest level in 18 months, despite the ongoing growth in the services sector.

    Additionally, the yield spread between the 10-year US Treasuries and 10-year Deutsche Bunds has increased to just below its largest since 1993, when the EU was established. Such dynamics suggest a that capital from the EU could be in its early stages, meaning the ECB could even maintain the QE into the next year, due to a threat of divestment.


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