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Draghi's taboo on QE endgame keeps investors guessing for months
[FRANKFURT] The European Central Bank has just six months left on its current bond-buying schedule, but it's in no hurry to talk about what comes next.
After opting not to use its June meeting to discuss ending the 2.3 trillion-euro (S$3.56 trillion) program, the Governing Council sees no need to make a decision until at least September, according to euro-area officials familiar with the matter. That means quantitative-easing plans for 2018 might be disclosed only in late October or, in the extreme, a couple of weeks before the end of this year.
The wariness among policy makers is a consequence of inflationary pressures that remain far too weak, prompting concern that any communication seen as hawkish might tighten market conditions sooner than warranted and set back the recovery. The risk is that the lack of any signals could stoke uncertainty and spur volatility as December approaches.
Most economists say the ECB will start winding down bond purchases at the beginning of next year from the current pace of 60 billion euros a month. If they're right, the Frankfurt-based central bank appears to be moving more slowly than the US Federal Reserve did when it went through the process four years ago.
Fed officials began discussing how to taper purchases at their June 2013 meeting, after a sharp market reaction to then-Chairman Ben Bernanke's out-of-the-blue disclosure in May that they might reduce monthly buying in the future. The minutes of that meeting emphasized that the decision would depend on how the economy evolved, and highlighted differing views on the best way to communicate the process.
Policy makers then frequently talked in public about tapering and the New York Fed included questions on the topic in its survey of primary dealers. That laid the groundwork for the December 2013 announcement that tapering would start the following month, putting it on a smooth path to concluding purchases by October 2014.
Aside from the initial shock - felt in markets around the world - volatility as a result of the Fed's ending of asset purchases was mild. Policy makers have since even managed to increase interest rates. The ECB would like to see similar calm, as Governing Council member Ilmars Rimsevics noted last week.
"We're one of the most predictable central banks. For us, forward guidance is important, and we don't want to have any surprises." Yet the strategy so far appears to be to avoid surprises by severely limiting any talk about tapering, with one official saying the topic was taboo until very recently. The Monetary Policy Committee, which prepares for Governing Council meetings, hasn't been asked formally to investigate options, the officials said. The ECB could simply continue purchases at full pace into 2018 if the inflation outlook fails to improve, they said.