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ECB Debates If 270 Billion-Euro QE Pledge Will Be Enough

Updated on
  • President Draghi holds briefing at 2:30 p.m. in Frankfurt
  • Communication changes unlikely before March policy meeting

ECB's Draghi Expected to Push Back on Euro Strength

When Mario Draghi addresses reporters on Thursday, he’ll probably repeat that returning inflation to target relies on the European Central Bank’s pledge to add at least another 270 billion euros ($330 billion) in stimulus.

Yet he’ll also be pushed after the January policy meeting to address the strength of the euro and to give more insight into when his institution will shift away from crisis-era measures.

The euro-area economy is expanding at the fastest pace in a decade, drawing both praise from global elites gathering this week in Davos, Switzerland, as well as calls to signal that years of bond-buying and negative interest rates will soon end.

The ECB’s first decision of 2018 comes six weeks after Draghi said that confidence in the region’s inflation path was growing, warranting the reduction in the pace of quantitative easing that started this month. Executive Board member Benoit Coeure has said he sees a “reasonable chance” the latest bond-buying extension will be the last.

Still, the euro has since surged to the strongest in more than three years against the dollar, and policy makers will have to judge whether that’s harmful to the economy. It stayed near that level on Thursday, bolstered by comments by U.S. Treasury Secretary Steven Mnuchin, who said a weak dollar is good for U.S. trade.

“The main shift in the past few months is that the ECB is becoming increasingly optimistic about the long-term outlook,” said Frederik Ducrozet, senior economist at Pictet Wealth Management in Geneva. “It’s no longer a recovery, but rather an expansion -- which means the currency can be higher and more manageable at those levels.”

What Our Economists Say...

“The balance of power inside the Governing Council is shifting in favor of the hawks. BE now expects the central bank’s asset purchase program to end this year, though a rate hike is unlikely before mid-2019.”

-- Maxime Sbaihi, Jamie Murray, David Powell and Niraj Shah, Bloomberg Economics

For more, see our Euro-Area Preview

One source of tension at this meeting may be the so-called capital key for asset purchases, a rule under which bonds are supposed to be bought in amounts proportional to the size of nations’ economies. Because assets in some countries are scarce, the ECB has been increasingly favoring debt issued by France or Italy, according to a report published this week by German research institute ZEW.

Growing Deviations

ECB's sovereign bond purchases have favored countries like France, Italy, & Spain

Source: ECB, ZEW Centre for European Economic Research

Note: "Capital key" refers to how large a country's economy is relative to the euro area, and is supposed to determine how much of a country's debt the ECB buys under QE

Bond buying has been halved to 30 billion euros, reflecting a decision taken by the ECB in October that stimulus should continue at a reduced pace until at least September. An account of the Governing Council’s December meeting showed that governors “widely shared” the view that they’ll need to tweak their policy guidance soon to align it with a strengthening economy.

Click here to set a reminder to watch Draghi’s news conference live.

For now, the Governing Council is seen as unlikely to make any big changes when it announces its decision at 1:45 p.m. in Frankfurt. Draghi will address reporters 45 minutes later. Economists surveyed by Bloomberg don’t expect policy makers to start making changes to their guidance until March, an end-date for asset purchases announced by June.

The Path to Zero

Economists see the ECB winding down net asset purchases through the end of this year

Source: ECB, Bloomberg survey conducted Jan. 12-18

Note: 2018 values refer to survey estimates

— With assistance by Piotr Skolimowski, Andre Tartar, and Richard Jones

(Updates with euro exchange rate in fifth paragraph.)
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