Policymakers cautious about QE exit strategy
Despite recovery, Europe’s central bank is in no rush to withdraw monetary support.
FRANKFURT/NEW YORK: The European Central Bank has convinced economists that it’ll take policy normalisation as gradually as it can.
Ninety percent of respondents in a Bloomberg survey say the ECB will use its meeting on Thursday to acknowledge that the risks surrounding the euro area’s recovery are balanced.
Beyond that, the 60 analysts are split on whether the central bank will remove its easing bias on interest rates, and the proportion expecting an announcement by September on the future of the bondbuying programme has fallen since the previous poll.
Amid a recovery that appears stronger by the day, the Governing Council looks set to use the Tallinn gathering — it occasionally meets outside Frankfurt — to have its first formal discussion on what an exit from stimulus might look like.
Even so, president Mario Draghi and some of his colleagues have damped expectations for any significant signals, warning that weak price pressures show there is no reason to rush to withdraw monetary support.
“The Governing Council is likely to remain very cautious in its communication about the exit strategy in an environment where, despite the good growth performance, the outlook for inflation remains bleak,” said Philippe Gudin, chief European economist at Barclays Plc.
Euro-area manufacturing and services continued to expand at the fastest pace in six years in May, according to IHS Markit’s composite Purchasing Managers’ Index.
Chris Williamson, chief business economist, said the outlook “seems to be tilting to the upside.”
At the last policy meeting on April 27, Draghi said that risks to growth were “moving toward a more balanced configuration” but were still tilted to the downside. Whether the “downside” reference is dropped has become a focal point for observers trying to gauge if a tipping point has been reached.
Of the six executive board members who set the agenda, Sabine Lautenschlaeger has recently said the risks are now balanced, Benoit Coeure has said they are rebalancing, and Yves Mersch has said that moment is within reach. Draghi, chief economist Peter Praet and vice president Vitor Constancio have remained more cautious.
“Everything we have heard from ECB officials since the last meeting suggest that any major shift in communication is off the table this week,” said Claus Vistesen, an economist at Pantheon Macroeconomics in Newcastle, UK. “The May inflation data added to the likely dovish bias and probably will force a marginal downward adjustment to the ECB’s 2017 inflation forecast.”
Consumer-price growth in the euro zone slowed to 1.4% last month from 1.9%, and core inflation cooled to 0.9%. The ECB says it isn’t yet convinced that inflation can hold at its goal of just under 2% over the medium term without monetary support.
Nearly half of the survey respondents say the ECB will cut its 2017 inflation forecast when it publishes fresh projections on Thursday.
Given that outlook, economists have pushed back the date at which they see the ECB dropping its guidance that rates might be cut further. Most now see that happening by the July 20 meeting, compared with a forecast in the April survey that it would happen in Tallinn.
While most economists still see the ECB announcing in September what its intentions are for the quantitative-easing programme, they’ve become less convinced. The 54 percent expecting a decision then is down from 67 percent in the previous poll.
The central bank currently says it’ll keep buying debt at €60 billion ($68 billion) a month until at least the end of the year. The tapering of QE is seen as starting by the first quarter of 2018 and taking seven months, up from six months predicted previously.
After Draghi and Praet went out of their way to knock down any debate over whether interest rates might rise before QE ends, economists are sticking to their forecast that the deposit rate won’t be lifted until the third quarter of 2018.
“Communication will be delicate,” said Kristian Toedtmann, an economist at DekaBank. “On the one hand, the ECB has to align its forward guidance and risk assessment with the improved economic conditions in order to remain credible. On the other hand, it doesn’t want to spark expectations of a near-term tightening.”