The European Central Bank’s governing council gathers in Frankfurt on Thursday to debate how it plans to wean the eurozone off its €2tn monetary stimulus programme that many credit with saving the bloc’s economy from stagnation.
The task facing the eurozone’s 25 monetary policymakers and ECB president Mario Draghi is how to step back from the massive bond-buying exercise known as quantitative easing without alarming investors and harming the bloc’s economic recovery.
The economic performance of the eurozone is improving, but the question to investors is what will happen to the ECB's stimulus program in 2018. At present, the central bank buys 60 billion euros a month in government bonds. The key to investors on Thursday will be the size and timing of asset purchases that will continue during 2018.
Draghi is expected to announce a delay in the bond purchase program worth between 20 and 40 billion euros. If the primary figure drops to 40 billion euros, the central bank may decide to limit QE to purchases for another six months. If the change is more dramatic and is closer to 20 billion, then a longer period of 9 or 12 months is expected.
The most controversial debate at this meeting today will be whether the ECB will declare that the economy has recovered enough to complete the QE by the end of 2018. If today Draghi brings clarity about the tapper, it will be the pace at which it will happened. In the scenario of termination within 6 months, we can expect a strong euro, while declining at a sustained pace will lead to a slight decline in the single currency.
Bundesbank President Jens Weidmann and Klaas Knot (President of the Dutch central bank) believe the ECB should commit to stop buying bonds. The bank, however, promised to continue to buy assets while the Council "maintained a lasting inflation adjustment in line with its inflation target".
“Investor reactions will crucially depend on whether the program remains open-ended,” said Nannette Hechler-Fayd’herbe, head of investment strategy and research at the wealth management’s division of Credit Suisse’s International. “If the door is left open — as we expect — then investors should react favourably with small market gains and a weaker euro as a dovish outcome has not been entirely priced in.”
Trader Nikolay Georgiev
Original Post: The future of QE: what to expect from Mario Draghi
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