ECB’s Draghi confronts crux of QE effect

Bloomberg

European Central Bank policy makers are wondering how much stimulus quantitative easing offers once bond-buying stops.
Their assessment will likely influence the ECB’s strategy for ending its asset-purchase programme. Keen to avoid any steps that inadvertently tighten financial conditions, policy makers can’t ignore that their open-ended QE design so far means investors are focused more on the monthly flow of acquisitions than the stock of debt accumulated in three years.
“Markets are trying to understand the ECB’s broader thinking when they read the flow of purchases,” said Jamie Murray, an economist at Bloomberg Intelligence in London. “While the stock is delivering the vast bulk of stimulus, changes to the flow may tell you something about when interest rates could start to rise.”
The ECB’s current tack puts every official remark under the microscope. Policy makers are aware of the challenge of communicating an exit from QE, and have held an extensive discussion about stock-versus-flow effects, according to people familiar with it.
The people asked not to be named because internal discussions are confidential. An ECB spokesman declined to comment.
There was a time when President Mario Draghi appeared to lean towards a definite goal for purchases, signaling in September 2014 that the ECB’s balance sheet would be expanded by about
$1.2 trillion to stave off the threat of deflation.
The balance sheet has since expanded by more than twice as much after that promise morphed into monthly targets—currently 60 billion euros—with no definite end. The Governing Council’s guidance that buying can be increased “in terms of size and/or duration” if the outlook worsens is further feeding investors’ interest in the QE flow, as is the ECB’s reinvestment of maturing debt.
Since March, the central bank has rolled over some 10.7 billion euros, according to ABN Amro, a number it estimates could increase to 640 billion euros by the end of 2020.
Draghi has so far remained elusive on what happens next, promising only that purchases won’t stop abruptly, and that a decision will be made in the fall. Most economists expect him to announce that QE will continue at a reduced pace starting early next year, and be gradually phased out before the end of 2018.
If the ECB chief wants to set out the intellectual framework for the Governing Council’s discussions at its next meeting on September 7, he has at least two platforms to do so. He’ll speak in southern Germany on August 23 and two days later will address the US Federal Reserve’s symposium in Jackson Hole, Wyoming.