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ECB suspense on QE may leave some investors less than thrilled

ECB suspense on QE may leave some investors less than thrilled

4 min. 02.09.2017 From our online archive
The Governing Council will hold its first formal talks next week on the pace of asset purchases after December, when the current programme is scheduled to expire.

(Bloomberg) The European Central Bank has a tight timetable for deciding the future of its bond-buying programme, but investors may face an even tighter one to adjust to the outcome.

The Governing Council will hold its first formal talks next week on the pace of asset purchases after December, when the current programme is scheduled to expire. Yet it’s conceivable that the decision won’t be finalised until the December 14 meeting, according to euro-area officials familiar with the matter. That would leave around 10 trading days, during a holiday season when volumes are typically low, for market participants to sort out their strategy for the New Year.

The ECB’s 25 policy makers have plenty to talk about: some say the euro area’s robust economic recovery warrants the winding down of bond purchases -- currently running at 60 billion euros a month -- while others point to feeble inflation as a reason to keep stimulus going. Yet leaving a decision too late could unnerve investors and push up the euro and bond yields, undermining the efforts so far.

“We’re all aware of the reality of the clock that they face,” said Charles Diebel, head of rates at Aviva Investors in London. “But markets have got very used to being told what’s coming a long time in advance, so to chance your arm and decide to wing it at the last minute in itself is like asking for trouble.”

Possible signals

Officials are aware of the risk of waiting too long, with two of the people saying they shouldn’t surprise investors by holding back every detail on the future of QE until the final meeting of the year. That suggests the ECB is still likely to deliver signals on the plan for asset purchases after one or both of the next two meetings. A spokesman for the central bank declined to comment.

Neither would a tapering decision at two weeks notice be unprecedented. When the US Federal Reserve decided to cut its own bond purchases starting in January 2014, it made the announcement on December 18 2013.

The difference is that the Fed started formal talks on tapering at their June 2013 meeting and frequently talked in public about tapering in the following months. The New York Fed even included questions on the topic in its survey of primary dealers.

The ECB has so far explicitly avoided putting the topic of next year’s purchases on the Governing Council’s agenda. At July’s session, it agreed to start discussions in “the fall,” but even then opted not to say if that necessarily meant the September 7 meeting.

The slide in the euro in reaction to the news that the full details of the asset-purchase plan may wait until until December might encourage those policy makers who expressed concern at the July meeting of a possible overshoot of the single currency.

The euro’s gain after President Mario Draghi’s speech in Portugal in June -- when he spoke of “reflationary forces” -- and the currency’s jump again last week when he opted not to try to talk it down in a speech in Jackson Hole, Wyoming, showed how sensitive markets are. That justifies extreme prudence, with changes to communication and policy likely to move even slower than originally expected, two of the people said.

Economic upturn

Some policy makers are more sanguine. Bundesbank President Jens Weidmann and Estonian central-bank governor Ardo Hansson have both said recently that the euro’s strength reflects the economy’s upturn and is nothing to worry about. Austrian Governor Ewald Nowotny said on Friday that he wouldn’t “dramatise” the gain.

But Nowotny also added that policy normalisation can’t be about “abruptly stepping on the brake.” It’s “sensible to see how to get off the accelerator and how to carefully initiate” the process, he said. Vice President Vitor Constancio said in a separate speech that while the euro area’s economic recovery is proving to be increasingly robust, a “strong worldwide reflationary phase that seemed likely at the beginning of the year has not materialised.”

Holding off until December would allow the ECB to tie its final decision to updated forecasts for growth and inflation, which will be published at that meeting. The central bank has frequently used revisions to the outlook to justify policy changes.

But for some commentators, the urgency for action is mounting because the ECB looks set to run into its self-imposed limits on how much debt it can buy from each nation, issuer and bond issue. The current schedule will take its purchases to 2.3 trillion euros, equivalent to almost a quarter of gross domestic product. The ECB’s balance sheet -- fueled by free loans to banks -- has soared to 4.3 trillion euros.

“Sticking your head in the sand until December and hoping the problem goes away is not a communication strategy,” said Richard Barwell, an economist at BNP Paribas Asset Management in London. “The issue limits are going to force them to exit prematurely. They cannot duck the consequences indefinitely.”