ECB QE Debate Next Week Might Lead to Policy Change
European Central Bank policy makers anticipate holding a pivotal discussion at their meeting next week that could conclude with a public announcement on when they intend to cease asset purchases, according to euro-area officials familiar with the matter.
President Mario Draghi’s Governing Council is likely to treat the June 14 gathering in Latvia as an opportunity to debate winding down bond-buying, said the officials, who asked not to be named because such matters are confidential. Purchases are currently intended to run until at least September.
While some see the meeting as a suitable moment to take and announce a decision on what to do after that, it’s possible nothing will materialize next week. 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 that conversation 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, Draghi kept the deliberations away from the future path of monetary policy despite a plea from Austrian Governor Ewald Nowotny to the contrary.
The euro erased its earlier losses on the report, trading little changed at $1.1695 at 6:11 p.m. Frankfurt time. Bund futures pared their gains in the late European session.
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. Italian bonds extended their decline during Prime Minister Giuseppe Conte’s maiden speech in the Senate on Tuesday.
Preparing Policy Steps
The ECB currently intends to keep buying debt at a pace of 30 billion euros ($35 billion) a month until at least September, and has signaled 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 U.S., 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.
Some clues to the board’s thinking may come from a speech by Peter Praet, the chief economist, on Wednesday morning. Officials start a week-long quiet period on Thursday during which they’re not supposed to comment on monetary policy.
courtesy : Bloomberg
photo : India.com
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