Economy

ECB close to settling question of bond-buying programme

Upcoming policy meeting pivotal for reaching decision on QE, ECB chief economist says

The ECB currently intends to keep buying debt at a pace of €30 billion a month until at least September. Photograph: iStock

Wed Jun 6 2018 - 09:57

European Central Bank chief economist Peter Praet has confirmed that next week's policy meeting will be pivotal for reaching a decision on when to end its bond-buying program.

His comments reinforce the view that the governing council is close to settling the question of how long it will continue to buy debt to support the euro zone economy. Members anticipate a fully fledged discussion that could conclude with a public announcement on when they intend to cease purchases, according to euro zone officials familiar with the matter.

"It's clear that next week the Governing Council will have to make this assessment, the assessment on whether the progress so far has been sufficient to warrant a gradual unwinding of our net asset purchases," Mr Praet said in a speech in Berlin on Wednesday.

Mr Praet also said “waning market expectations of sizable further expansions of our program have been accompanied by inflation expectations that are increasingly consistent with our aim.” In addition, inflation signals “have been improving.”

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Policy Clues

The remarks are significant because Mr Praet crafts the policy proposals for the Governing Council. Asset purchases are currently scheduled to run until at least September.

Policy makers are likely to treat next week's gathering as an opportunity to debate winding down bond-buying, said officials, who asked not to be named because such matters are confidential. Still, it's possible nothing will materialize. President Mario Draghi may use his press conference to signal an announcement will come in July, one of the people said. An ECB spokesman declined to comment.

Even just having the conversation though would be a significant leap forward on the path to unwinding unprecedented stimulus, after months in which the ECB avoided formally addressing the matter. In April, Mr Draghi kept the Governing Council's deliberations away from the future path of monetary policy despite a plea from Austria's Ewald Nowotny to the contrary.

June may prove to be a critical opportunity for the central bank to show its confidence in the euro-area economy. While the pace of growth has slowed from last year's decade high, the expansion remains intact and inflation jumped last month. The bond-market scare that hit Italy last week appears to be contained for now, meaning it's unlikely to affect monetary policy.

A June decision also has the advantage of being accompanied by fresh economic forecasts, which are published every quarter, should those predictions show output remaining robust and price growth gradually accelerating.

By July, the outlook may appear more clouded. Inflation is expected to slow as energy costs come off a peak, and Italy's new government has pledged to pursue a high-spending agenda that could bring it into conflict with European Union rules.

Preparing Policy Steps

The ECB currently intends to keep buying debt at a pace of €30 billion a month until at least September, and has signalled that purchases won’t end abruptly. Economists largely see the program being tapered to zero by the end of the year, though the proceeds of maturing bonds will continue to be reinvested. Interest rates will be kept at current record lows until “well past” the end of net purchases.

Some policy makers have urged the ECB to start the process of reinstating interest rates as the primary tool after more than three years of unconventional support. Executive Board member Sabine Lautenschlaeger said last month that June might be the month to decide "once and for all" to gradually conclude net asset purchases by the end of this year.

More cautious officials are likely to point to the risks posed by an escalating trade dispute with the US, as well as to recent economic data. Purchasing managers' indexes published Tuesday showed services activity in the euro area slowed in May, led by Germany and France, the region's two biggest economies.

Preparations for the June meeting, to be held in the Latvian capital of Riga, still have a way to go. They'll include the finalization of the economic projections, a meeting of the Monetary Policy Committee that offers policy options, and a session of the six-member Executive Board that crafts proposals for the Governing Council.

Officials are about to start a week-long quiet period during which they’re not supposed to comment on monetary policy. – Bloomberg

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