ECB Seen Topping Up QE Once More With Short Taper in Late 2018

The European Central Bank will spend 2018 guiding its bond-buying program to a gentle halt as the euro zone benefits from the most-synchronized economic growth in two decades, according to a Bloomberg survey.

Policy makers, who have already agreed to halve monthly purchases to 30 billion euros ($35 billion) starting next month, will taper them to zero in the final three months of the year, the poll of economists showed. Still, most respondents said that decision won’t be taken until June or July as President Mario Draghi and his colleagues fret about upsetting markets by signaling an exit from crisis measures too soon.

“As things currently stand, we don’t see much action from the central bank in the first half of 2018, with a very much steady-as-she-goes policy remaining in place,” said Alan McQuaid, chief economist at Merrion Capital in Dublin, Ireland.

The survey points to a relatively quiet policy meeting on Dec. 14, when the highlight will be the ECB’s updated estimates for economic growth and inflation. Those figures will include the first projections for 2020, and will emphasize how far the Frankfurt-based central bank is lagging behind some of its counterparts.

The U.S. Federal Reserve, which has already started shrinking its balance sheet to unwind its quantitative easing, is set to announce its third interest-rate increase of the year on Wednesday, and signal more for 2018. The Bank of England will probably stay on hold when it sets policy on Thursday, less than an hour before the ECB, though that’s after it hiked rates last month for the first time in a decade.

The 19-nation euro area is enjoying its strongest economic growth in a decade and the most broad-based since 1997, yet the ECB has pledged to buy bonds until at least September — taking its total holdings to more than 2.5 trillion euros.

The ECB has pledged to hold interest rates steady until well after it stops net asset purchases. The deposit rate is at a record-low minus 0.4 percent, and most economists predict an increase no sooner than the second quarter of 2019.

That leaves the focus in coming months on the policy language. Officials currently use forward guidance to promise to keep buying debt until inflation is back on track to the goal of just under 2 percent — a level not seen on a sustained basis in almost five years.

Executive Board member Benoit Coeure has said he expects the link between QE and inflation will be able to be loosened before September. Chief economist Peter Praet has said guidance will focus increasingly on interest rates as the end of bond-buying nears.

“The ECB is likely to maintain the view that rates will stay at present levels well into 2019,” said Elwin de Groot, senior market economist at Rabobank NV in Utrecht, Netherlands. “Establishing a link between rates policy and the achievement of its inflation goal makes sense.”

When Draghi addresses reporters on Thursday, he’ll almost certainly stress that even after the ECB stops adding to its holdings, support will continue to come from reinvestment of maturing debt. Most respondents in the survey said they expect reinvestments to continue for at least two years after net asset purchases end — and it could be far longer.

“With policy rates at their lower bound and accumulated assets approaching self-imposed limits, reinvestments become the major source of flexibility,” said Kristian Toedtmann, an economist at DekaBank in Frankfurt. “The ECB could reinforce the effectiveness of the asset-purchase program if it committed to continue with reinvestments for several years.”
Source: Bloomberg

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