While European Central Bank 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. An ECB spokesman declined to comment.
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 yesterday, 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 $1.1523 at 10:30am Frankfurt time yesterday, down 0.3% 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 market reaction has made some policy makers more cautious, three of the people said. Bond purchases are currently scheduled to continue at €60bn ($69bn) a month until at least the end of the year.
Governors are likely to be told that the outlook hasn’t changed much since their last session in Tallinn six weeks ago. The economy continues to expand at a robust pace but inflation and wages remain subdued, with little sign of acceleration. Weaker oil prices and a stronger euro will also be under scrutiny.
Consumer prices rose an annual 1.3% last month, compared with a goal of just under 2%, and the ECB has repeatedly said that growth is still dependent on continued monetary support.
The seven-week hiatus before the next policy meeting on September 7 will give officials some time to monitor economic developments 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 market reaction to Draghi’s statement of the obvious at Sintra has spooked enough governors to influence their communication strategy,” said Richard Barwell, an economist at BNP Paribas Asset Management in London. “They will signal that they plan to continue buying bonds for longer than they actually will, and sound more concerned about hitting the inflation target than they actually are.”
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.
Draghi himself will have the opportunity to set the stage for the September policy meeting when he attends the Kansas Federal Reserve’s symposium in Jackson Hole, Wyoming, on August 24-26.
When the US Federal Reserve decided to wind down its own QE programme, it made the announcement in December 2013 before starting tapering the next month. While that move came after months of public debate, the ECB may consider that the Fed’s experience has already resolved some of the unknowns of any exit strategy.
The Governing Council will announce its interest rates and stimulus settings at 1:45pm Frankfurt time today, with Draghi holding his press conference 45 minutes later.
The ECB headquarters in Frankfurt. The bank’s 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.
