Warsaw/New York: A timeline for the end of European Central Bank (ECB) stimulus is taking shape among economists.
Policy makers will wait until at least June before upgrading their assessment of the risks to the euro-area recovery and won’t announce another reduction in bond purchases until September, according to most respondents in a Bloomberg survey. Tapering quantitative easing and starting to raise interest rates will take until at least the end of next year and possibly into 2019.
Despite more than three years of growth and inflation that is now nominally above his goal, ECB president Mario Draghi is pushing back against calls to reduce monetary support for the euro area. The chronology envisaged in the survey would give officials space to judge risks including populist gains in national elections this year and the impact of US President Donald Trump’s economic policies.
No economists foresee any change to QE or rates on Thursday, when the Governing Council meets in Frankfurt. A minority predict a significant change in policy language, or a renewed round of long-term loans to banks.
“We are now very much in a wait-and-see situation,” said Alan McQuaid, chief economist at Merrion Capital in Dublin. “With key elections across Europe, we feel that the central bank will wait until the German election is out of the way on 24 September before committing to any further policy changes. That said, the heat is on.”
After the inflation rate quadrupled to 2% in just four months, pressure has built on policy makers to map out an exit from unconventional stimulus that started in the summer of 2014. Draghi has argued the spike is mainly due to energy and underlying price pressures remain weak, and urged patience in an uncertain global environment.
About one-third of the economists said the Governing Council will decide in June to change its assessment, and 27% predict a shift this week. The ECB’s current assessment is that the risks to the outlook remain tilted to the downside.
More than half of the respondents predict the Governing will follow up in September by announcing changes to its €2.24 trillion ($2.4 trillion) QE program. A reduction of the monthly purchase volume and the extension beyond 2017 is forecast by 82% of participants in the survey, which was conducted from 27 February to 2 March.
Almost three-quarters of economists said tapering will begin in the first quarter of 2018. It is predicted to take seven months. Respondents are evenly split over whether the ECB will commit to a stated pace of phasing out buying or announce reductions one step at a time.
Political developments could still throw this timeline into disarray. Six days after the ECB meets, the Netherlands will hold an election that could see gains by euro-skeptics. That same week, financial officials from the Group of 20 countries will meet in Baden-Baden, Germany, where they’ll seek a better sense of whether the US will follow through on Trump’s criticism of global trade rules.
The focal point remains France, where Marine Le Pen has promised to renegotiate the country’s membership in the European Union and the single currency if she is elected president in May. Germans head to the polls in September.
“The ECB’s possible changes to QE are conditional on the outcome of French elections,” said Hlias Tsirigotakis, an economist at National Bank of Greece SA in Athens. “Any political turmoil will result in the ECB postponing its tapering process.”
According to Frederik Ducrozet, an economist at Pictet & Cie in Geneva, the ECB will signal “a less dovish stance, one step at a time,” starting with an upgrade of its economic forecasts this week. Bundesbank president Jens Weidmann already signalled that euro-area inflation projections for this year could be raised by half a percentage point. The ECB currently expects the rate to average 1.3%.
Changes in interest rates remain a long way off. Sixty percent of the economists expect that by December the ECB will change its guidance that rates will remain at present or lower levels. Nearly half predict borrowing costs will remain unchanged until 2019 or later.
As for Draghi’s performance rating, a growing number of economists are confident that he’ll be able to leave office with a sense of mission accomplished. More than 80% of respondents predict inflation will reach the ECB’s goal—a sustained medium-term rate of just below 2%—before his tenure ends in October 2019. That’s up from 74% in the previous survey.
For the time being though, underlying price pressures continue to be weak and “moderate interest rates remain necessary to sustain a higher inflation rate,” said Valentin Bissat, an economist at Mirabaud & Cie in Geneva. “If the ECB were to discuss QE tapering, interest rates would rise too high and put the economic recovery at risk.” Bloomberg