Change Is Coming at the ECB. Just Not Quickly.
The European Central Bank is wrestling with how to exit the super-accommodative policy that's dominated Mario Draghi's tenure as president.
In trying to determine the path of this off-ramp, it might be instructive to look backward. To December of last year, to be precise. That's when the ECB took what looks in retrospect like a first tentative step back from quantitative easing, the huge program of bond buying aimed at keeping interest rates low.
At that time, officials were loath to call the initiative a taper. They may be more relaxed about labels this time, given the revival of the euro region's economy.
Draghi's scheduled appearance next month at the Federal Reserve's Jackson Hole retreat -- a kind of Davos in the world of central banking -- fueled speculation he'll unveil the exit there.
In reality, the ECB governing council's Sept. 7 meeting looks like a surer thing. That's the day policy makers will be given new forecasts on inflation and growth, providing justification for whatever route officials ultimately choose. There's a meeting this week that may begin preparing the ground.
Don't look for a sudden end to bond purchases, and don't even think about an increase in the ECB's benchmark interest rate. The latter probably won't come until 2018, if then, according to most economists.
Although inflation is crawling upward, it hasn't hit the ECB's target of just below 2 percent since 2003. True, Draghi isn't the only central banker battling too-low inflation. (Remember when that would have been a good problem to have!) The Fed, by way of comparison, at least hit its 2 percent target in February, though it has subsequently slipped.
So in terms of inflation, the ECB really starts the conversation in a different place from the Fed, the Bank of Canada and the Bank of England. The first two have raised interest rates and the latter might do so as soon as next month.
As Draghi noted last month at the ECB's own confab in Sintra, Portugal, deflationary forces are on the run and reflationary forces are at work. Economic confidence is up, growth has accelerated for three consecutive quarters, spending and investment are on the rise.
He didn't say deflationary trends have been banished altogether. That go-slow approach is likely to carry the day. Make no mistake, the ECB does have to do something: The current program of 60 billion euros ($69 billion) a month of bond purchases is due to end in December.
So in coming months they are likely to announce reductions in the amount of bonds they purchase to keep interest rates low. It will still be stimulative, just less so. The direction is clear; it's all about the pace officials travel.
Recent remarks from Bank of France Governor Francois Villeroy de Galhau are instructive, and not just because he is a contender to succeed Draghi, now in the home stretch of his eight-year term. In a Bloomberg Television interview, Villeroy referred a couple of times to "adapting the intensity" of policy in the autumn.
The easy translation of that is this: The ECB will begin a tapering program. Officials already sort of did that in December when bond purchases went from 80 billion a month to 60 billion.
Not that everyone agrees. The head of the Dutch central bank frets openly about a policy mistake. Bond buying could go on too long and create a crisis by plowing too much money into the financial system. And Bundesbank President Jens Weidmann uses terms like "monetary policy normalization," usually code for ending quantitative easing much more quickly than Draghi would and getting on with the task of raising rates.
Absent a crisis, central banks tend to do things gradually. That's why some kind of taper looks like the easy option. Meanwhile, the clock ticks down to December when the ECB's bond-buying authority expires.
After the summer holiday seems like a fine time to get everyone on board. Draghi will be hoping the region's recovery doesn't "adapt its intensity" in the wrong direction before he can do so.
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