Draghi's Taboo on Endgame for QE Keeps Investors Guessing

  • Central bank said to be holding back from analyzing QE options
  • Policy makers apparently moving slower than Fed four years ago

Mario Draghi.

Photographer: Emmanuel Dunand/AFP via Getty Images

The European Central Bank has just six months left on its current bond-buying schedule, but it’s in no hurry to talk about what comes next.

After opting not to use its June meeting to discuss ending the 2.3 trillion-euro ($2.6 trillion) program, the Governing Council sees no need to make a decision until at least September, according to euro-area officials familiar with the matter. That means quantitative-easing plans for 2018 might be disclosed only in late October or, in the extreme, a couple of weeks before the end of this year.

The wariness among policy makers is a consequence of inflationary pressures that remain far too weak, prompting concern that any communication seen as hawkish might tighten market conditions sooner than warranted and set back the recovery. The risk is that the lack of any signals could stoke uncertainty and spur volatility as December approaches.

Most economists say the ECB will start winding down bond purchases at the beginning of next year from the current pace of 60 billion euros a month. If they’re right, the Frankfurt-based central bank appears to be moving more slowly than the U.S. Federal Reserve did when it went through the process four years ago.

Fed officials began discussing how to taper purchases at their June 2013 meeting, after a sharp market reaction to then-Chairman Ben Bernanke’s out-of-the-blue disclosure in May that they might reduce monthly buying in the future. The minutes of that meeting emphasized that the decision would depend on how the economy evolved, and highlighted differing views on the best way to communicate the process.

Market Calm

Policy makers then frequently talked in public about tapering and the New York Fed included questions on the topic in its survey of primary dealers. That laid the groundwork for the December 2013 announcement that tapering would start the following month, putting it on a smooth path to concluding purchases by October 2014.

Aside from the initial shock -- felt in markets around the world -- volatility as a result of the Fed’s ending of asset purchases was mild. Policy makers have since even managed to increase interest rates. The ECB would like to see similar calm, as Governing Council member Ilmars Rimsevics noted last week.

“We’re one of the most predictable central banks. For us, forward guidance is important, and we don’t want to have any surprises.”

Yet the strategy so far appears to be to avoid surprises by severely limiting any talk about tapering, with one official saying the topic was taboo until very recently. The Monetary Policy Committee, which prepares for Governing Council meetings, hasn’t been asked formally to investigate options, the officials said. The ECB could simply continue purchases at full pace into 2018 if the inflation outlook fails to improve, they said.

The officials all asked not be named because their discussions are confidential. An ECB spokesman declined to comment.

“I don’t expect to hear anything on what the plans are until September -- that’s quite tight,” Juergen Stark, who was the ECB’s chief economist from 2006 until he resigned in 2011, said at an event in Bern, Switzerland. “That would suggest that the program continues in the first quarter without any change.”

A key difference between the euro area and U.S. is that the 19-nation currency bloc is still struggling with weak price growth. In 2013, the Fed viewed longer-term inflation expectations as stable. In contrast, the ECB is faced with a renewed decline in expectations and a headline rate that it predicts will still be short of its goal in 2019.

“The ECB is extremely frustrated about weak core inflation and every frail number shakes the exit path,” said Holger Sandte, chief European analyst at Nordea Markets in Copenhagen. “January as the beginning of tapering stands, but September as the month of announcement is becoming wobbly.”

The Governing Council’s next policy meeting is in July, and activity typically slows in the subsequent summer lull. The critical sessions are likely to be the final three of the year, two of which will be accompanied by fresh economic projections, which are often used to back up major policy shifts.

Pressure to start preparations may gain momentum now that the Governing Council has cleared the first hurdles, dropping its expectation that rates might be cut again and describing the risks to economic growth as broadly balanced. Some members were relieved those changes in June didn’t prompt a strong market reaction, one of the officials said.

The need for a well-planned exit strategy might be particularly high in the currency bloc. QE was implemented in 2015 only after hard-fought internal battles and as the threat of deflation became acute. Now, with nations at different points in the economic cycle, and euro-area companies far more dependent on bank lending than in the U.S., the ECB can’t be sure it can simply copy the Fed model on the way out.

German Elections

One option might be to use the July or September meetings to agree terms of reference for the Eurosystem committees, as a prelude to a decision in October. Draghi took a similar tack in September 2016, tasking the committees with studying options for QE before announcing in December that the program would be extended and adjusted.

That maneuver would have the advantage of waiting until after parliamentary elections on Sept. 24 in Germany, where any bond-buying extension is likely to be viewed unfavorably.

An October announcement might be as late as the ECB could go without provoking an outcry from some Governing Council members though. Delaying until December would be negligent, one of the officials said. Waiting until that close to the end of the program, when upcoming holidays reduce liquidity, could throw the market into tumult.

Echoing that sentiment, Belgian central-bank head Jan Smets told Bloomberg Television on Monday that the time is close for policy makers to get to work.

“We’ll have to make up our mind before the end of the year. We’ll not wait until New Year’s Eve to tell what will happen on Jan. 1. So we’ll have to look into this in the next months.”

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