ECB Said to Build Taper Consensus as QE Decision Nearsby , , and
Scenarios include slowing QE by 10 billion euros a month
Decision on when to start tapering depends on economic outlook
The European Central Bank will probably gradually wind down bond purchases before the conclusion of quantitative easing, and may do so in steps of 10 billion euros ($11.2 billion) a month, according to euro-zone central-bank officials.
An informal consensus has built among policy makers in the past month that asset buying will have to be tapered once a decision is taken to end the program, the officials said, asking not to be identified because their deliberations are confidential. They didn’t exclude that QE could still be extended past the current end-date of March 2017 at the full pace of 80 billion euros ($90 billion) a month.
The Governing Council, which is holding an interim meeting on Tuesday before members go to the International Monetary Fund in Washington, has just four policy-setting sessions left until the currently scheduled expiry of QE. Since Sept. 8, when officials kept their stimulus package unchanged and left the question unresolved of whether bond purchases will be extended, investors have been left guessing on when and how the program will end.
“The Governing Council has not discussed these topics, as President Mario Draghi said at the last press conference and during his recent testimony at the European Parliament,” the ECB said in an e-mailed statement.
“QE is due to run until March 2017, and the most likely outcome to us is that it goes on for at least another six months at 80 billion euros per month after that,” said Marchel Alexandrovich, senior European economist at Jefferies International Ltd. in London. “Later in 2017, the ECB could think about tapering, and say try to wind down the program in March 2018, but these are hypothetical exit strategies, not something the ECB will likely implement for a while. Ultimately, the decision will be driven by the outlook for inflation.”
Draghi has repeatedly said that QE will run until the end of March 2017 “or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim.”
The ECB predicted in September that consumer-price growth would accelerate to an average of 1.6 percent in 2018, remaining below its goal of just under 2 percent that the institution hasn’t met since early 2013. A projection for 2019 projection will be published in December.
Tapering by as much as 10 billion euros a month would mean following a similar strategy to the U.S. Federal Reserve, which started reducing its monthly bond purchases by $10 billion in December 2013 and ended them in October 2014, as a way of minimizing market disruption.
While the ECB’s final decision will depend on the euro area’s economic outlook, it will also be affected by the success of attempts to address a scarcity of assets to buy. The Governing Council has tasked its committees with considering adjustments to QE, such as loosening self-imposed rules that make some bonds ineligible. The next policy meetings are scheduled for Oct. 20, Dec. 8, Jan. 19 and March 9.
Even when QE finishes, the ECB’s balance sheet won’t shrink immediately. The central bank has already committed to reinvest the cash from maturing bonds. That means the stimulus effect will be maintained until the end of 2020, Dutch central bank governor Klaas Knot said last month.
The discussions will also be influenced by a weariness in recent months about the burden that the ECB has had to carry. Officials are so concerned that governments are wasting the opportunity of ultra-loose monetary policy to make structural adjustments that they’ve set up a task force on economic reforms to consider the impact of various fiscal strategies.
Draghi has in the past two weeks told lawmakers in the European and German parliaments that while monetary officials will do what’s needed to revive euro-area inflation and economic growth, governments must take on more of the onus.
He’ll have another opportunity to send a signal on the ECB’s thinking when he holds a press conference in Washington on Oct. 8 after the IMF meetings. Executive Board member Peter Praet and other members of the Governing Council are also due to speak at events around those talks.
The IMF may be a suitable backdrop for Draghi to signal that the appetite for more QE is waning, especially in the absence of support from governments. In its World Economic Outlook published on Tuesday, the Washington-based lender said that the ECB should maintain its “current appropriately accommodative stance,” but fiscal policy should also be used to bolster the recovery.
The ECB is “vigorously counteracting risks to price stability” and has supported economic growth and employment in the euro area, Draghi said in his speech to the German parliament on Sept. 28. “In order to reap the full benefits of our monetary-policy measures, other policy areas must contribute much more decisively, both at the national and at the European level.”