FRANKFURT (Reuters) - Sluggish growth has not weakened the European Central Bank’s resolve to end a bond-buying scheme later this year but could make it more cautious about signaling interest rate hikes, conversations with four sources close to the matter indicate.
ECB stimulus has fueled a five-year growth run and policymakers have been setting up markets for the end of the euro zone central bank’s 2.55 trillion asset purchase scheme. But some analysts have started to voice doubts that it can cut stimulus further given the unexpected growth weakness and political uncertainty in Italy.
Speaking on condition of anonymity, the sources said recent soft indicators suggest growth is leveling off — settling into a lower gear but still performing above potential, which will continue to generate inflation.
They added that higher oil prices and a weaker euro are likely to mean an increase in some of the ECB’s headline inflation projections next month. Core inflation projections will not change significantly when the new estimates are released, however, and some growth forecasts are likely to be cut.
Higher headline inflation, expected to start showing up in the summer months, could also could provide support for the bank to announce the end of its bond buys. But the sources said that the focus remains on core inflation, and that a side-effect of higher oil prices could be slower growth.
The sources said there was unusual unity among ECB rate-setters about ending the bond purchase scheme after a short taper, and that the real debate would be about the future path of interest rates.
While markets now see rates rising roughly six months after the ECB ends bond buys, some of the sources said that this timeline could be challenged if the growth environment weakens further. That could mean a delay in the first hike and a shallower rate path, they noted.
While surging Italian yields were a worry, the sources said the new government has yet to enact policies that would be alarming and they hoped that an already significant market backlash would discipline the anti-establishment government.
The ECB declined to comment. The sources noted that no decision has been made and that the future of the bond-buying scheme may be decided only at the bank’s July 26 meeting.
Reporting by Francesco Canepa; Editing by Catherine Evans