Eu­ro­zone’s next move

ECB may cut quan­ti­ta­tive eas­ing flow in half next year

The Star Malaysia - StarBiz - - Features - By CAROLYNN LOOK and JANA RANDOW

EURO­PEAN Cen­tral Bank (ECB) of­fi­cials are con­sid­er­ing cut­ting their monthly bond buy­ing by at least half start­ing in Jan­uary and keep­ing their pro­gramme ac­tive for at least nine months, ac­cord­ing to of­fi­cials fa­mil­iar with the de­bate.

Re­duc­ing quan­ti­ta­tive eas­ing € (QE) to 30bil (US$36bil) a month € from the cur­rent pace of 60bil is a fea­si­ble op­tion, says the of­fi­cials, who asked not to be iden­ti­fied be­cause the de­lib­er­a­tions are pri­vate.

That re­duced flow would match ex­ist­ing pre­dic­tions from econ­o­mists at in­sti­tu­tions in­clud­ing ABN Amro Bank NV and Bank of Amer­ica Mer­rill Lynch.

Pol­i­cy­mak­ers led by Pres­i­dent Mario Draghi are be­com­ing in­creas­ingly con­fi­dent that they can agree on Oct 26 to the specifics of how much debt the eu­ro­zone’s cen­tral banks will buy in the com­ing months.

Af­ter more than 2½ years of try­ing to re­vive the re­gion’s econ­omy through bond pur­chases, some gov­er­nors see the re­cent pe­riod of ro­bust growth as a rea­son to rein in the sup­port. Oth­ers are con­cerned that in­fla­tion re­mains too weak.

“The pack­age seems to mean that yes, the ECB is tak­ing a step down, but there is enough in terms of com­mu­ni­ca­tion and guid­ance to keep mar­kets calm and make sure fi­nan­cial con­di­tions re­main easy,” says Nick Kou­nis, an econ­o­mist at ABN Amro who is based in Am­s­ter­dam.

“There seems to be a con­sen­sus on this com­ing to­gether, a ma­jor­ity. Even some of the more hawk­ish mem­bers un­der­stand that you have to wind down QE very grad­u­ally.”

While gov­er­nors are split on the need to iden­tify an end date for pur­chases, a pledge to keep buy­ing bonds un­til Septem­ber – with the pro­viso that it could be ex­tended if needed – may of­fer grounds for com­pro­mise, the of­fi­cials say.

ECB guid­ance

Any changes to the sum and time­frame of QE eas­ing would still fit into the ECB’s present guid­ance on mone­tary pol­icy, a prom­ise to a “sus­tained ad­just­ment in the path of in­fla­tion con­sis­tent with its in­fla­tion aim.”

It also pledges that if “the out­look be­comes less favourable, or if fi­nan­cial con­di­tions be­come in­con­sis­tent with fur­ther progress to­ward a sus­tained ad­just­ment in the path of in­fla­tion, the Gov­ern­ing Coun­cil stands ready to in­crease the pro­gramme in terms of size and/or du­ra­tion.”

Pol­icy mem­bers have yet to of­fi­cially dis­cuss op­tions, and aren’t sched­uled to meet again as a group un­til Oct 25, in prepa­ra­tion for their de­ci­sion the next day. Such meet­ings have some­times pro­duced out­comes that haven’t been clearly en­vis­aged in ad­vance.

An ECB spokesman de­clines to com­ment.

The euro was lit­tle changed on the day at US$1.1830 at 10:08am in Frank­furt yes­ter­day. Ger­man bund yields fell the most in al­most three weeks as gov­ern­ment bonds rose across the eu­ro­zone.

The in­sti­tu­tion’s chief econ­o­mist Peter Praet has hinted on sev­eral oc­ca­sions that he would pre­fer to al­low QE to con­tinue at a slower pace for longer if mar­kets stay calm, ar­gu­ing that a sub­stan­tial amount of aid is still needed to spur in­fla­tion to­ward the ECB’s goal of run­ning in­fla­tion just below 2%.

Praet said this week that of­fi­cials should con­sider mak­ing pub­lic some of the de­tails on how ma­tur­ing debt bought un­der QE is rein­vested.

“Cru­cially, the base­line sce­nario for fu­ture in­fla­tion re­mains con­tin­gent on easy fi­nanc­ing con­di­tions, which, to a large ex­tent, de­pend on the sup­port of mone­tary pol­icy,” he said at an event in Wash­ing­ton on Thurs­day.

The Gov­ern­ing Coun­cil would “re­cal­i­brate its in­stru­ments ac­cord­ingly, with a view to de­liv­er­ing the mone­tary pol­icy im­pulse that re­mains nec­es­sary to se­cure a sus­tained ad­just­ment in the path of in­fla­tion.”

In the mean­time, Draghi said in Wash­ing­ton that the ECB’s prom­ise that in­ter­est rates would re­main low “well past” bond-buy­ing is “very, very im­por­tant.”

The In­ter­na­tional Mone­tary Fund this week pre­dicted the eu­ro­zone will see in­fla­tion of 1.5% this year and 1.4% next year. ECB staff see in­fla­tion even lower in 2018, at 1.2%, be­fore an ac­cel­er­a­tion to 1.5% in the fol­low­ing year. That’s still un­der­shoot­ing the in­sti­tu­tion’s goal of just below 2%.

“I think they’ll con­tinue to buy as­sets for po­ten­tially longer than the con­sen­sus at this point in time, not nec­es­sar­ily in large amounts, but more that they’ll want to con­tinue to sup­port the mar­ket,” Char­lie Diebel, head of rates at Aviva In­vestors on Lon­don, said on Bloomberg Tele­vi­sion. “Be­cause as it stands now, their long-term in­fla­tion fore­cast is not quite as high as they’d like it.” — Bloomberg

Pol­icy re­view: A man takes a photo of the sun­set be­hind ECB head­quar­ters in Frank­furt. The cen­tral bank’s of­fi­cials say re­duc­ing quan­ti­ta­tive eas­ing to €30bil a month from the cur­rent pace of €60bil is a fea­si­ble op­tion. — AP

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