ECB Seen Delaying QE Exit Decision as Trade Concerns Mount

Updated on
  • Economists still predict asset purchases will end this year
  • Protectionism seen as bigger threat than recent slowdown

ECB Said to See Scope to Wait for a July QE Signal

Mario Draghi will take longer to lay out the European Central Bank’s plan to exit unconventional stimulus as protectionism threatens the euro-area outlook, economists say in a Bloomberg survey.

No change to policy settings or language is expected from the Governing Council meeting on April 26, and respondents pushed back their estimates for when the ECB president will communicate the next step toward normalization. They still see asset purchases ending this year.

Click here to see the full survey

Most said the potential for a global trade conflict in coming months is a bigger concern than the current economic slowdown.

“The ECB will maintain its expectation of strong and broad based growth,” said Kristian Toedtmann, an economist at DekaBank. “But as long as the risk of a trade war isn’t off the table and the series of weak economic data hasn’t ended, the ECB is likely to postpone important decisions about its future monetary policy.”

Unwinding Stimulus

Milestones on the ECB's path toward monetary-policy normalization

Source: Bloomberg survey of economists conducted April. 12-19

Note: Timeline shows dates by when most economists predict a given action

The Governing Council has tweaked its policy language over the past months, acknowledging the sturdiness of the region’s upswing. Another small step -- such as dropping the need to see a “sustained adjustment” in the inflation outlook as the precondition for ending asset purchases -- could come as early as June, according to approximately half of the respondents. That’s down from more than 80 percent in the previous survey -- before the introduction of U.S. metal tariffs raised the specter of a global trade war.

Most respondents predict the ECB will set an end-date for bond-buying in July or September. Only 36 percent expect a June decision, down from 46 percent.

“The ECB will have to use communication very cautiously and try to avoid an unwarranted restriction of monetary conditions,” said Intesa Sanpaolo’s economist Annamaria Grimaldi. “However, extending asset purchases much further beyond September seems to us unjustified at this stage as the risk of deflation is off the radar.”

Path to Zero

The ECB will phase out net asset purchases by the end of the year

Source: Bloomberg survey of economists conducted April 12-19

Economists predict officials will add 35 billion euros to quantitative easing in the fourth quarter before halting, taking total holdings to just under 2.6 trillion euros. Reinvestment of maturing debt is seen continuing for two to three years.

What Our Economists Say...

“The euro area doesn’t need more stimulus for the inflation target to be met in the medium term -- the cyclical recovery is largely complete. The ECB is taking baby steps toward ending its asset purchases, as it has done since the recovery gathered momentum. We’re not expecting any major changes at the April meeting, but change will keep coming.”

-- Jamie Murray and David Powell, Bloomberg Economics. Read their full preview here.

For a study by Tom Orlik and Justin Jimenez on increased transparency in central banking, click here.

Changes to the pledge that interest rates will remain unchanged until well past the end of net bond-buying are also predicted by September.

A first increase in the deposit rate to minus 0.2 percent from minus 0.4 percent is expected by the second quarter of 2019. That’s in line with a scenario outlined this month by Ewald Nowotny, Austria’s central-bank head. He was publicly rebuked by the ECB, which said his views don’t represent those of the Governing Council.

An increase of the main refinancing rate, currently set at zero, is now projected by the third quarter of 2019, one quarter later than previously. In a separate note, Danske Bank economist Piet Christiansen predicts the first hike in both rates won’t come before December 2019.

Risks to Outlook

A U.S. trade spat with China is more worrying than slowing economic momentum

Source: Bloomberg survey of economists conducted April 12-19

Disappointing data recently may prevent the ECB from giving any hints about the end of asset purchases next week, according to Jennifer McKeown of Capital Economics. A key concern in coming months will be the impact any trade spats on the single currency, which has gained 15 percent against the dollar in the past year.

“We doubt that trade policies will have a big impact at this stage,” she said, but “Draghi will probably warn that any further appreciation of the euro exchange rate related to global factors would put downward pressure on euro-area inflation and hence lead the central bank to delay policy normalization.”

— With assistance by Carolynn Look

(Updates with Danske comment in 11th paragraph.)
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