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ECB seen going all the way on QE as taper doubted by economists

Monday, April 27, 2015 - 07:57
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The European Central Bank won't end its asset-buying program early, though it might do so abruptly, economists say.

[FRANKFURT]The European Central Bank won't end its asset-buying program early, though it might do so abruptly, economists say.

More than two-thirds of respondents in a Bloomberg survey said the ECB will stop quantitative easing in September 2016, as currently planned, and most of those said it'll do so without tapering purchases. The remaining analysts said policy makers will gradually wind the program down, with the end-date ranging from December 2016 to December 2017.

Massive stimulus from record-low borrowing costs, a weaker euro and cheaper energy is stoking speculation over how quickly the ECB might reach its inflation goal and complete a 1.1 trillion-euro (US$1.2 trillion) programme that started only last month. The risks related to policy tightening were highlighted in 2013 when global market volatility escalated as the Federal Reserve signaled it was ready to taper its own QE.

"One could argue that if inflation gets on the right track before the summer of 2016, some tapering appears in May, but then they are likely to miss their balance-sheet expansion target," said Julien Manceaux, senior economist at ING Belgium SA in Brussels. "This is why we do not think there will be tapering before the program stops."

To spur inflation, the ECB intends to expand its balance sheet to about 3.1 trillion euros from 2.3 trillion euros currently, in part by buying government bonds, agency debt and private securities. Economists in the survey predicted that level will be surpassed in 2016 and reach 3.4 trillion euros by the end of that year.

The pace of the euro area's economic recovery should be evident this week with data forecast to show the inflation rate returning to zero in April, after four months of declining consumer prices. Unemployment is probably at the lowest rate in three years and economic confidence at the strongest since 2011, separate surveys show.

In the central-bank survey, 46 per cent of economists said QE will end in September 2016 without tapering, and 23 per cent said the ECB will slow purchases before halting them in that month. None said the program will stop before September 2016.

ECB President Mario Draghi played down talk of an early end to QE after the Governing Council's April 15 policy meeting. He reiterated the plan to spend 60 billion euros a month until the end of September 2016 or policy makers are confident medium-term inflation is headed for their goal of just under 2 per cent.

"I'm quite surprised, frankly, by the attention that a possible early exit of the program receives," he told reporters in Frankfurt. "It's like asking yourself, after 1 kilometre, are we going to finish this marathon?"

Even so, Mr Draghi is likely to continue to face questions on QE as the recovery gathers momentum. More than two-thirds of respondents said the economic outlook will improve in the short term - only the second time that a majority has said so since the question was first included in March 2014.

"The ECB has no reason to stoke the early-exit fire at the moment," said Duncan de Vries, an economist at NIBC Bank NV in The Hague. "But with inflation rates slowly moving upward, improving lending data and business surveys suggesting a pickup in activity, doubting the ECB's willingness to remain aggressive is a natural response of the markets."

Economists said 70 per cent of total asset purchases will be sovereign debt, 15 percent covered bonds and 10 percent agency debt, with the rest spent on asset-backed securities. Respondents also see a 25 per cent chance that the central bank will add corporate bonds to the mix, according to their median estimate. Some investors have expressed concern that the ECB will run up against a scarcity of debt.

"It would make some sense to diversify to corporate bonds and senior financials," said Kristian Toedtmann, an economist at DekaBank in Frankfurt. "On the other hand, the ECB seems to consider it as relatively complicated to include corporates into its purchase program. So it continues to be a close call."

As bank lending starts to improve after an almost three- year slump, economists raised their outlook for the long-term loans the ECB offers financial institutions. The takeup over the life of the targeted loans, which are linked to new lending, is now seen at 505 billion euros, up from 360 billion euros in the previous survey in March.

The drop in the euro, which helps the recovery by cutting the cost of exports, isn't over yet, according to 88 per cent of respondents. The single currency has fallen more than 20 per cent against the dollar since May, when Draghi signaled he was ready to step up stimulus, to about US$1.08. It'll bottom out at parity with the US currency, the median forecast showed.

ECB Executive Board member Peter Praet, the central bank's chief economist, said in Berlin last week that the euro area is "seeing the beginnings of a cyclical recovery, but it is not yet a structural one." That reflects the view that amid sluggish economic reforms and risks such as the Greek financial crisis, monetary stimulus provides a critical support that mustn't be withdrawn too soon.

"A rather strong economic recovery will lead to intensified discussions about a premature tapering," said Christopher Matthies, an economist at Sparkasse Suedholstein in Neumuenster, Germany. "We don't expect this to be a Governing Council majority position."

BLOOMBERG