What to Expect From the ECB Meeting

In what many regard as its most important policy meeting of the year, the European Central Bank is set to announce Thursday its plans for balance-sheet management in 2018. Policy makers hope to emulate the Federal Reserve in setting out a plan that not only strikes the right balance for the economy, but does so without disrupting financial markets. The challenge is that the euro zone’s overall economic and financial conditions are notably more complicated than those of the U.S. And this matters beyond Europe, given the scope for German yields, in particular, to influence those on other government bonds, including Treasuries, as well as currency markets and overall financial stability.

The most likely outcome from the ECB’s Governing Council deliberations is specific guidance to the markets on a very gradual reduction in monthly asset purchases, combined with two-way optionality to accommodate the prospects for both fluid and uncertain economic and financial conditions. In the first instance, this could involve cutting by around half the current pace of monthly purchases of 60 billion euros ($71 billion), together with more signals that successful implementation and follow-up balance-sheet tweaks would need to come before any move up in what are still negative policy interest rates.