ECB ex­am­ines QE op­tions for Septem­ber de­ci­sion

Muscat Daily - - BUSINESS -

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.

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