FRANKFURT: The ECB’s meeting on Thursday to discuss how and when it should bring large-scale bond purchases to an end is one of the most keenly anticipated by investors and economists since early 2015 when the program was unveiled. The decision will be announced at 1.45 pm in Frankfurt and Draghi will speak 45 minutes later.
It’s something of a crossroads for the ECB chief, who faced down the sovereign-debt crisis and near-deflation in the euro area but may end his term in October 2019 without reaching the central bank’s inflation goal or raising interest rates.
The Governing Council looks likely to cut monthly asset purchases from 60 billion euros (US$71bil) and stretch them out for as long as capacity allows while it waits for consumer-price growth to pick up.
The president won’t want to repeat the mistake of his predecessor Jean-Claude Trichet who raised interest rates twice in his final months in charge in 2011, only for Draghi to reverse the hikes shortly after taking office.
Economists in a Bloomberg survey foresee a nine-month extension of quantitative easing at around 30 billion euros a month, starting in January, though there are a range of potential outcomes. Bloomberg economists expect purchases of 40 billion euros for at least six months.
While Governing Council members are split over whether to set a firm end-date for the programme, one option is to keep the current pledge to extend the program or increase the monthly pace if needed.
The ECB is also considering highlighting a related measure: the reinvestment of the proceeds of bond holdings as they mature. That additional spending, which will average about 15 billion euros a month in 2018 and could run for years, could work as a shock absorber amid any market concerns about the pullback in stimulus.
Economists don’t expect any change to the forward guidance that interest rates will remain unchanged until “well past” the end of net asset purchases. They foresee a rate hike, which would be the first under Draghi’s presidency, only in the first half of 2019 at the earliest.
A critical factor for the ECB is the amount of debt still available under its own rules. Some officials see room for little more than 200 billion euros of purchases in 2018, which would bring total holdings to around 2.5 trillion euros.
While central banks in some smaller countries are already running into shortages, the most prominent concern is Germany. It accounts for the biggest share of QE yet the government’s budget surplus means the nation’s pool of debt is shrinking.
Policy makers will have to calibrate carefully how fast they scale down purchases. Too brusque an exit may jolt the euro and German bonds. Policy makers at the last two Governing Council meetings expressed concern that the single currency’s surge this year -- up 12% against the dollar -- could undermine the recovery by curbing inflation and damping exports.
The good news -- which Draghi can be expected to emphasize -- is that the region’s economy is on track for its fastest expansion in a decade and is probably capable of withstanding a moderate shock.
Yet the ECB head repeatedly says that “we aren’t there yet” on inflation, which was just 1.5% last month and which the central bank predicts won’t return to its goal of just under 2 percent before at least late 2019.
What matters for the ECB is that inflation is self-sustained rather than dependent on monetary stimulus or volatile elements such as oil and food, and there are nascent signs of improvement. Bloomberg’s measure of supercore inflation, linked to spare capacity in the economy, has picked up.
The key missing element might be wages, which are barely rising despite the relatively rapid decline in unemployment over the past four years. One possible explanation is that the standard measure is underestimating joblessness. The ECB has developed a broader measure including those who work less than they want, and it’s almost double the official rate.
Governing Council member Ewald Nowotny of Austria has gone so far as to call for higher pay deals.
Recent public comments by Governing Council members suggest that their positions have been converging as the bond-buying program nears an exit, and Draghi has said he expects to reach agreement on the “bulk” of the decisions at this meeting.
Still, with 19 central-bank governors and six Executive Board members, they could still stumble. If so, it’s back to the drawing board at the final meeting of the year on Dec 14. - Bloomberg
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