ECB plays for time as pressure grows on easy money
The European Central Bank will prefer to play for time and seek to calm financial markets than sketch out the exit from its easy-money policy at its Thursday meeting, analysts agree. Conflicting pressures are squeezing the ECB: A stronger euro and stillsluggish inflation could justify prolonging its “quantitative easing” bond-buying programme, but it is approaching the legal limits of the scheme and may be forced to wind it down.
“The big question for this week’s meeting is whether (ECB President Mario) Draghi will shed some light on the ECB’s game plan for tapering,” or winding down its quantitative easing QE (programme), economist Carsten Brzeski of ING Diba bank said.
Draghi deliberately left the date of the decision vague after the last meeting, promising an update in the “autumn” — which most analysts have taken to mean September or October.
Along with low interest rates and cheap loans to banks, the ECB’s 60 billion euros ($71.5 billion) of bond purchases per month are designed to encourage growth in the 19-nation euro zone, pushing inflation towards its target of just below 2.0 per cent.
Data that will feed into the ECB staff ’s September forecasts for the coming years have yet to show price growth on track.
The projections will reflect the accelerating economic growth of 0.6 per cent seen in the single currency area between April and June.
But August figures from statistics agency Eurostat showed inflation at 1.5 per cent, well short of the central bank’s goal
Meanwhile, the “core” measure highlighted by ECB policymakers, which excludes volatile food and energy prices, reached just 1.2 per cent.
One reason is that the euro has appreciated against other currencies as the recovery gathers pace, braking price growth as imports become cheaper.
Nevertheless, “euro strength is unlikely to derail the euro zone recovery, leaving the ECB on track for a tapering announcement relatively soon,” said economist Marco Valli of UniCredit.
“Regardless of the exact timing of the announcement, what really matters is the final outcome,” Valli added. “Expect the ECB to reduce stimulus next year, but in a very gradual and open-ended fashion.”
Following July’s meeting of the governing council, Draghi emphasised the need to be “persistent and patient” in the face of unresponsive inflation, suggesting that an end to QE will be drawn out.
Policymakers still see slack in the euro zone economy, and have pointed to slow wage growth linked to still-high unemployment and underemployment in some member countries. as the biggest factor holding back inflation.
Prolonging the ECB’s intervention could support growth and inflation for longer, making a withdrawal without major upsets more certain.
But the bank is running up against the limits set in its own rules and insisted on by European and German courts, which bar it from buying more than 33 per cent of any one country’s debt.
Coveted German bonds have also become scarce on the market, making it difficult for the ECB to buy in proportion to the “capital key”, or the share of its capital contributed by each euro zone nation.
“Technical constraints are already biting, and will get worse,” said Valli.
“Due to bond scarcity, some kind of tapering in 2018 is unavoidable,” ING’s Brzeski agreed.
Policymakers would look for a way to make tapering as painless as possible for the economy, he added.
Almost 80 per cent of respondents in a Bloomberg News survey of economists agreed that the ECB would reduce its monthly purchases from January.
A large majority of analysts also expect the bank to announce only one tapering “step” at a time, leaving its options open to boost QE again if the impact on the economy and the inflation outlook is too severe.
For September, though, “We expect that Thursday’s meeting will again be about what Draghi did not say, rather than what he did,” Brzeski said, leaving central bank watchers to sift the president’s words for hints about the decision day.