ECB finds common ground on rates

Bloomberg

European Central Bank (ECB) policy makers are poised to preserve their commitment to ultra-low interest rates even as they wrangle over how long
to keep their bond-buying
program going.
Members of President Mario Draghi’s Governing Council will meet this month amid discord over whether a strengthening economy means now is the time to plot an end to more than 2 1/2 years of quantitative easing or whether to keep it going until inflation accelerates.
Where there is agreement is on keeping a pledge to not raise interest rates until “well past” the end of bond buying, according to euro-area central bank officials, who declined to be named because such matters are confidential. Maintaining that promise would remove one potential point of contention in the debate while offering reassurance to investors that higher borrowing costs won’t be imminent when purchases slow.
Two officials expressed concern that the guidance may even need strengthening as financial markets may question whether there will be a long-enough pause between the end of purchases and the first rate hike. An ECB spokesman declined to comment on the forthcoming decision.
Any move to loosen the language first introduced in March 2016 would risk resuscitating investors’ doubts on the path of monetary policy, first stoked earlier this year when the Governing Council debated whether to raise interest rates before the completion of quantitative easing, the euro-zone officials said.
Laborious Discussion
Policy makers are bracing for a laborious discussion on October 26 that pits Northern European proponents of spelling out a stimulus conclusion against colleagues from weaker economies who favor an extended, or even indefinite, expansion of bond buying. The latter worry that disappointing inflation rates remain too feeble to withstand any market tightening, while others see robust growth as a reason to rein in bond purchases.
Chief Economist Peter Praet has hinted at a preference for allowing QE to continue at a slower pace for longer if markets stay calm, which could also help cement the impression of an extended low-rate stance. For governors who want to see an end date to purchases, such an approach might be acceptable as a compromise if it does include a time horizon, according to two of the euro-area officials. The ECB could always link that date with a pledge to extend buying if the outlook were to deteriorate significantly, one of them said.
“Given that we still need more confidence on inflation, I think a certain duration would be an interesting feature,” Governing Council member Jan Smets said in an interview with Market News International on Wednesday, adding that he expected any recalibration to be “gradual and cautious.”
Governors are chewing over the options but aren’t due to gather formally again until they the day before the next decision. Informal talks may take place in coming days as officials attend the International Monetary Fund meetings in Washington.
The ECB acknowledged last month that the debate on how to “recalibrate” bond buying was focused on balancing the size of monthly purchases against their overall duration. Despite a formal insistence that the supply of securities available isn’t a matter affecting policy, officials privately admit that they do face a shrinking pool of eligible assets.
The program is currently scheduled to scoop up 60 billion euros ($71 billion) a month of bonds until the end of this year, and how much room the ECB still has before running into self-imposed limits is a key element of the debate. While two of the euro-zone officials referred to a market estimate centered on about 270 billion euros, one of them cited calculations pointing to a narrower space of about 200 billion euros.
Should the monthly pace be slowed substantially, the ECB could try to mitigate any impact by stressing its reinvestments, which will allow them to replace about 15 billion euros a month of maturing assets with new purchases, people familiar with the matter have said.
ECB President Mario Draghi has pledged to deliver the bulk of his institution’s stimulus plans for 2018 at the October meeting. For anything left over to determine, officials then have one more gathering this year, on December 14.