Draghi’s silence on ‘easing’ affects ECB policy

Bloomberg

Mario Draghi’s silence on the future of quantitative easing is complicating a key aspect of the European Central Bank’s policy process.
The ECB president and his colleagues typically back up shifts in strategy with their economic projections, which are based on market indicators that include expectations for future policy. Except that less than four months before the current asset-purchase programme is due to end, the Governing Council hasn’t provided any details on the scale of stimulus beyond 2017.
The upshot is that investors are being forced to second guess the ECB’s intentions, potentially leaving Draghi with a set of economic forecasts skewed by their perspectives on growth and inflation. While uncertainty in forecasting is a perennial problem for any central bank, it’s especially critical for the ECB right now as officials start to deliberate how fast they might be able to bring unconventional stimulus to an end.
“The ECB is setting its monetary policy based on forecasts, which are based on asset prices which reflect the market’s best guess about what the ECB will do,” said Richard Barwell, an economist at BNP Paribas Asset Management in London. “The whole thing is circular.”
The Governing Council started its two-day policy meeting on Wednesday. Robust and increasingly broad economic growth has stoked speculation that asset purchases, scheduled to run at$71 billion a month until at least December, will be wound down even while inflation remains below target.
BlackRock’s Isabelle Mateos y Lago expects a one-step reduction to as low as 30 billion euros a month, while Collineo Asset Management forecasts policy makers won’t start to pare back asset purchases until the end of 2018 and will take two years to wind down the programme. Economists surveyed by Bloomberg predict the ECB will gradually taper buying over nine months from January.
December Risk
Investors could be kept waiting for a definitive decision. The Governing Council may not be ready to finalise its strategy until December, according to people familiar with the matter. While officials are aware they shouldn’t keep investors in the dark until the final session of the year, they may only be able to deliver general indications this week or at the policy meeting in October.
The ECB says its projections, which are updated quarterly, are built on forward market prices such as interest rates, assets, oil and exchange rates. Those can change radically—the euro has appreciated more than 7 percent since mid-May, the cut-off date for the previous round of forecasts. In addition to its standard formulas, the central bank relies on satellite models and equations to gauge the impact of non-standard policy.
Draghi was elusive in June when asked about how much central-bank support the latest forecasts entail. His reply was that the predicted pickup in inflation is predicated on a “very substantial amount of monetary accommodation” and “that’s what it is in the projections.”

Mario Draghi’s claim of QE flexibility attracts doubters
Bloomberg

The European Central Bank may not have as much flexibility left in its bond-buying program as Mario Draghi insists.
As the Governing Council kicks off discussion about the future of its asset purchases, the question that will loom large is how much wiggle room policy makers have to extend their 2.3 trillion-euro programme. Not much, according to two economists. They believe the ECB’s decision to wind down bond buying next year will be a matter of necessity rather a choice.
“Bond scarcity is increasing in more and more countries,” says Louis Harreau, an ECB strategist at Credit Agricole CIB in Paris. “The ECB will be forced to reduce its QE regardless of economic conditions, simply because it has no more bonds to purchase.” But working out how much space the central bank still has is fiendishly hard.
That’s because the asset-purchase program is like a three-dimensional game of chess spread over bonds from 18 euro-area states. The 19th member, Greece, is excluded from the programme.
The euro-area central banks have quotas to meet in buying each nation’s debt based on the size of their economies.