ECB Meeting to Be Watched for Baby Steps Toward Pullback on Stimulus

The eurozone economy is accelerating, but the European Central Bank seems reluctant to take its foot off the gas. That has set the bank on a collision course with officials in the euro area's largest economy, Germany.

On Thursday, ECB chief Mario Draghi will announce the bank's latest policy decisions in Estonia's capital city, Tallinn. Investor expectations for changes are low, as top officials have stressed in recent days it is too early for any major moves.

Still, some officials have warned against the dangers of moving too slowly as the economy recovers, which could harm the bank's credibility with investors. That suggests some change is in order, to pave the way for an exit from stimulus later in the year. Here are key questions ahead of the central bank's policy release, due at 1145 GMT (7:45 a.m. EDT).

What is expected from the ECB on Thursday?

Baby steps. Policy makers are likely to express greater confidence in the economic recovery, an important signal that they are moving closer to reducing their monetary stimulus. They might also rule out any fresh interest-rate cuts. But changes to the stimulus itself -- which includes subzero interest rates and EUR60 billion ($68 billion) a month of bond purchases -- are unlikely.

How strong is the eurozone economy?

It is enjoying its longest growth spurt in almost a decade. Recent surveys suggest growth is accelerating and broadening to former weak spots like Finland and Portugal. Also, political uncertainties are fading following Emmanuel Macron's victory in French national elections last month, though they haven't disappeared: Germany and Italy both face national elections over the coming months.

So can the ECB's stimulus soon be wound down?

Not so fast. ECB officials still are concerned about inflation, which, at 1.4%, is some way below the ECB's target of just below 2%. They also may be wary of repeating previous policy mistakes in 2008 and 2011, when the ECB raised interest rates only to quickly change course as economic troubles ensued. Most economists expect a few more months' delay, until September or October, before the ECB signals a reduction of its bond-buying program, known as quantitative easing.

What else might the ECB do?

Clarify its next steps. Some investors are betting that the ECB will start raising interest rates before it has wound down QE, contrary to the bank's current guidance. Mr. Draghi might clarify that sequence, and announce an internal review into different exit strategies. He might also drop a pledge to accelerate QE if the economic outlook darkens, although that is considered unlikely at this stage.

What about Germany?

As the ECB's balance sheet has sprinted past that of the Federal Reserve, German officials have called ever more urgently for a policy change from Frankfurt. Chancellor Angela Merkel took the rare step last month of blaming the ECB for the nation's vast trade surpluses. Increasingly, Germany is no longer a lone voice: The Organization for Economic Cooperation and Development, a rich-country think tank, argued this week that the ECB should start winding down QE next year. Mr. Draghi might seek to address such concerns.

Write to Tom Fairless at tom.fairless@wsj.com

(END) Dow Jones Newswires

June 08, 2017 01:14 ET (05:14 GMT)