ECB examines QE options for September decision
Frankfurt, Germany - While European Central Bank (ECB) policy makers look forward to a summer break, the institution is quietly working on stimulus plans for them to consider on their return.
The ECB’s Frankfurt-based staff are examining scenarios for the future path of quantitative easing ahead of a Governing Council decision that is expected to take place in September or later, according to euro-area officials familiar with the matter. The people asked not to be named as the work is confidential.
The analysis doesn’t mean a stimulus change is imminent. No definite proposals or timings have been devised and policy makers, who started a two day meeting in Frankfurt on Wednesday, haven’t yet held formal discussions on the end of bond purchases. Officials have limited appetite for any significant change in their policy language for now, the people said.
Governing Council members are in agreement that they need to move carefully. The chief concern is that investors might jump on any signal that bond purchases are about to be tapered, pushing up market interest rates and undermining the euro-area recovery.
The risk was highlighted by the rally in bond yields and the currency after ECB president Mario Draghi’s June 27 speech in Sintra, Portugal, when he said reflationary forces were now at play in the euro area.
While financial conditions have loosened again since those remarks, the euro is near the strongest against the dollar since 2015. It traded at US$1.1523 at 10:30am Frankfurt time on Wednesday, down 0.3 per cent on the day.
“The ECB’s biggest challenge is that the outlook for inflation remains very unclear. They had put a lot of emphasis recently on the fact that, despite a recovery in the labour market, wage growth has been disappointing,” said Marchel Alexandrovich, an economist at Jefferies in London. “This means that even in September they may not be in a position to offer a clear roadmap for how quickly stimulus will be scaled down next year.”
The seven-week hiatus before the next policy meeting on September 7 will give officials some time to monitor economic devel- opments and develop their views on the best path for QE. Economists surveyed by Bloomberg see that meeting as most likely for an announcement, and predict the ECB will start winding down bond purchases at the start of next year.
The staff’s preliminary work, which will be refined in coming weeks, includes the announcement of a tapering path, an extension of asset purchases at a reduced pace and a combination of strategies, two of the people said.