ECB Searches for Stimulus Flexibility as End of QE ApproachesBy
Euro zone set to enter new era of central-bank support
President Draghi scheduled to speak twice before next meeting
The European Central Bank wants more scope to unleash monetary stimulus even as it heads toward unwinding it.
An account of the Governing Council’s July meeting released on Thursday shows that officials are still uncertain how to signal changes in their policy settings as the economic outlook improves and the need for broad-based bond purchases lessens. Reaching a consensus is critical if they are to avoid missteps as the institution enters a new phase of its multi-year battle to avert deflation and restore euro-area price stability.
Some policy makers signaled they are anxious to press ahead with adjusting the ECB’s forward guidance to avoid a “misalignment” between communication and the assessment of the economy, while others were looking for an insurance should the situation worsen. They argued for “more policy space and flexibility” to adjust stimulus “if and when needed, in either direction” in response to any overreaction to economic improvements in financial markets.
“The ECB is aware of the fact that some changes to the current policy stance are about to come,” said Carsten Brzeski, chief economist at ING-Diba in Frankfurt. The comments “fit into the picture of an ECB which wants to steer and moderate the process toward tapering extremely cautiously.”
With euro-area inflation at just 1.3 percent compared with a goal of just under 2 percent, officials have all reason to be careful. One risk weighing on policy makers’ minds is the strengthening currency, which depresses import prices and so curbs inflation, as the account of the meeting made clear.
“Regarding exchange rates, while it was remarked that the appreciation of the euro to date could be seen in part as reflecting changes in relative fundamentals in the euro area vis-à-vis the rest of the world, concerns were expressed about the risk of the exchange rate overshooting in the future.”
The July meeting came just a few weeks after Draghi himself sent the euro soaring when he said in a speech in Sintra, Portugal, that reflationary forces have returned. The latest call for flexibility was accompanied by a desire among officials to avoid such market disruptions as far as possible.
“It was generally judged paramount at this stage to avoid sending signals that could be prone to over-interpretation and might prove premature.”
While the account gave little indication as to policy makers’ intentions, it did offer one clue on how the ECB might communicate a QE exit -- by explicitly tying its accommodation to the full range of its possible measures rather than the current heavy weighting toward the asset-purchase program, which currently spends 60 billion euros ($70 billion) a month on debt and is set to run until the end of the year -- unless the central bank extends it.
“The Governing Council’s assessment of progress regarding a sustained adjustment in the path of inflation should apply to the overall design and direction of the ECB’s monetary policy stance as a whole, and not with reference to any particular instrument in isolation, such as the duration and pace of APP asset purchases.”
Should President Mario Draghi wish to clarify the ECB’s thinking, he has at least two platforms to do so before the Sept. 7 policy meeting. He’ll address a conference in Germany on Aug. 23, and two days later attends the U.S. Federal Reserve’s Jackson Hole symposium.
“A decision is going to come by October,” said Florian Hense, an economist at Berenberg in London. “Depending on how inflation is doing until then and the currency and the economy, that’s going to determine how quickly they taper.”