Sunday 22 September 2019

Debt costs face ECB 'fireworks' over QE tapering

ECB president Mario Draghi.
ECB president Mario Draghi.

Colm Kelpie

Today's hotly-anticipated meeting of the ECB's Governing Council is a critical one that could provide "fireworks for financial markets", analysts have said.

The Frankfurt-based central bank is likely to decide the fate of its €2.3trn stimulus scheme today - currently due to run until December - in a move that could jolt the euro even higher.

Economists expect ECB chief Mario Draghi to say asset purchases will continue until September next year at a reduced pace of €30bn a month from the current €60bn rate.

But a decision to limit monthly bond purchases to as little as €20bn may jolt the euro and German bonds more than other potential tapering outcomes, experts have said.

"Strong growth, lower unemployment and a positive outlook for Europe has allowed the ECB to concentrate on how it will manage an exit from this programme, therefore the focus for the meeting will be on how much more they will do and when quantitative easing will likely end," said John Moclair, Head of Global Customer Group, Bank of Ireland Global Markets.

"The single currency has a large part to play in this process."

The Governing Council is faced with a difficult balancing act - below par inflation supports the idea of maintaining asset purchases for longer, but strong growth suggests stimulus is no longer needed.

But the pace at which the loosening takes place could impact on the strength of the euro.

"Relative to expectations, something less than a nine-month extension would be taken as quite a strong signal by the market which could see further strengthening of the euro back towards $1.20," Mr Moclair added.

"However, on the flip side a decision to maintain the €60bn a month levels of QE should see the euro under significant pressure back towards $1.15."

The head of the Munich-based Ifo economic institute, Clemens Fuest, called on the European Central Bank to scale back its bond purchases as of January.

"The speed at which it phases out purchases should depend on developments in economic growth, the inflation rate and inflation expectations. If the upturn in the euro area becomes firmly established, the ECB could scale back its purchases to zero by March," he said.

The balancing act facing the ECB has become a focal point for markets trying to assess just what shape a scaling-back or "tapering" of stimulus is likely to take.

A scenario where the ECB only cuts to €40bn a month and keeps the stimulus running for a year could result in the euro falling to $1.16 and bund yields falling to 0.3pc, strategists said.

"The ECB Governing Council (GC) meeting looks set to be a critical one, given officials' hints that the GC will outline the next stage of its QE programme, or to use the ECB buzzword, its 'recalibration'," said specialist bank Investec Ireland.

"Market reaction to [the] announcement and press conference is critical. In particular, the Governing Council wants to contain the value of the euro (already up by 5.5pc in trade weighted terms since the turn of the year) and limit any steepening in the yield curve, both of which could slow the recovery and put unwanted downward pressure on inflation."

Yesterday, NTMA boss Conor O'Kelly signalled QE had been good for Ireland, saying our debt interest bill is now under €6bn rather than the €10bn it had been projected to be by now in 2013. (Additional reporting Bloomberg)

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