The ECB is Poised to Unwind QE

11 June of 2018

There are several upcoming economic and monetary policy events that will take place next week, including both the ECB monetary policy meeting and the Federal Reserve FOMC meeting.  While the Fed is expected to increase rates and continue a path to normalization, the ECB is expected to begin to phase out its quantitative easing program. Their action will likely generate volatility in online trading, like the market tantrum experienced when the Fed first announced the termination of its bond purchase program.

Many believe that Mario Draghi will use the June 14 meeting to announce the phasing out of net asset purchases by the end of this year. This has been confirmed by ECB speakers, including Peter Praet this week. Draghi will likely want to wrap the announcement in dovish language and confirm that the stock of assets will be maintained for the foreseeable future, which means the reinvestment of redemptions will keep the ECB busy in bond markets. A possible confirmation of the sequencing of rates might mean that the ECB may want to remain non-committal for now. However, downside risks from political events in Europe and on the world stage could multiply.

ECB comments this week Confirm the Phasing Out of QE

ECB comments this week finally confirmed that the central bank is now ready to commit to a phasing out of QE. Remarks on May 29 from Executive board member Lautenschlaeger were largely overlooked. Markets were glued to political events in Italy and assumed that the widening of spreads might push out the ECB’s policy schedule. With inflation jumping higher, and peripheral bond markets starting to come down, the ECB may be inclined to move early and announce the end of QE already with the updated forecasts set for June, rather than waiting until July.

June Will be a Live Meeting

The confirmation that June will indeed be a live meeting, arrived this week. ECB head Draghi remained in hiding, perhaps to avoid sparking speculation that ECB policies have anything to do with political antics in his home country. But Praet is a pretty good proxy for the central bank head. The ECB’s chief economist used the last day before the start of the blackout period ahead of next week’s council meeting to say that the Governing council will have to make this assessment, as to whether the progress so far has been sufficient to warrant a gradual unwinding of our net asset purchases.

Chief Economist explains the ECB’s View

Praet went on to cite how he perceived the markets’ view of further sizeable expansion, and inflation expectations that are increasingly consistent with the ECB’s aim. Praet was eager to stress that ultimately, the decision will hinge on the judgement of the Governing Council at large. However, Praet is the chief economist. He is almost as dovish as Draghi and likely to have pretty much outlined what view the Executive Board will present at the meeting. The ECB must know that there could be a temper tantrum like the backlash seen by the Fed when it started to unwind its asset purchase program.

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