ECB Policy Makers Worried Markets Expect More QE ExtensionsBy
Account of Oct. 26 meeting showed debate on QE open-endedness
Various QE sizes and duration discussed by Governing Council
Some European Central Bank policy makers worried at last month’s meeting that a failure to put an end-date on their bond-buying program might stoke unwarranted speculation by investors that purchases could be prolonged again next year.
“The open-ended nature of the asset purchase program might generate expectations of further extensions as the intended end date of the program approached,” accounts of the Oct. 25-26 Governing Council session showed on Thursday. “From the current perspective, that did not appear justified in the absence of major new shocks.”
The ECB decided to extend quantitative easing at the diminished monthly pace of 30 billion euros ($36 billion) at least until September 2018, pledging to do more if the inflation outlook failed to improve. While that decision was supported by a “large majority,” according to the accounts, several alternative solutions were put forward and discussed at the meeting.
“Some initial preferences were expressed for a smaller overall envelope of intended APP purchases, as well as for a different monthly pace of purchases for a given intended envelope,” the summary showed. Some members said the euro area’s robust economic recovery warrants a short purchase horizon.
Others wanted a longer purchase horizon to provide more prolonged monetary support, and expressed concern about the potential for the unintended impact of setting a firm date to stop.
“The announcement of an end date could induce market participants to frontload possible price adjustments, which might lead to an undue tightening in financial conditions,” the accounts showed. “Retaining the open-endedness of the APP underscored the Governing Council’s steadfast commitment” to maintain the monetary stimulus to bring inflation back to the ECB’s goal of just under 2 percent.
The discussion in the Governing Council highlighted how the euro area’s solid recovery has strengthened and broadened. That was confirmed on Thursday when data showed the region’s economy is still on track for its best annual performance since the financial crisis, with companies boosting hiring at the fastest pace in 17 years.
One of the arguments in favor of the final decision was that it was “in line with prevailing market expectations” and therefore “unlikely to trigger significant movements in financial prices.” Critics cautioned that the Governing Council shouldn’t give “undue weight” to potential adverse reactions from investors, focusing instead “what was required to achieve its medium-term objective” of price stability.
“Several” policy makers also said that the current ECB guidance linking asset purchases to an improving inflation outlook should eventually be replaced “with a reference to the monetary policy stance, in all its dimensions.”
The summary included a proposal by Executive Board member Benoit Coeure that gave some insight into how the four elements of QE might be configured next year. He said that after asset purchases slow in January, “the private-sector programs would not be adjusted in strict proportion to the overall scaling down.”