Europe’s monetary custodians agree that their current forward guidance will need to be adjusted if the inflation rate moves towards the ECB’s target. This emerges from the account of the ECB Governing Council’s monetary-policy meeting on 14th December. The focus here, it should be noted, is less on the outlook for key rates than on the future configuration of the bond-purchase programme (APP). To date, the ECB’s guidance has been that net asset purchases will continue until at least September 2018. If the path of inflation is not consistent with the bank’s inflation aim by then, the ECB has signalled that it „stands ready to increase the APP in terms of size and/or duration.“ This latter passage now appears to be the subject of debate. The formulation regarding the deposit rate – „or lower“- was already removed last year.
The discussion which has been gaining traction in the Governing Council about adjusting forward guidance has become more acute in recent days. For example, Bundesbank President Weidmann has demanded that a concrete end date be set for the asset-purchase programme. In general, advocates of an adjustment to forward guidance point out that such a step could take account of the improving economic framework conditions. In reply, doves on the Governing Council emphasise that underlying inflation remains stuck at a low level even though the economic recovery is expanding further, arguing that an ample degree of monetary accommodation is still required in this connection.
We are not expecting a significant adjustment to forward guidance in the coming months. The formulation in the latest account to the effect that the Council’s forward guidance “could be revisited early in the coming year“ suggests, however, that Dr. Draghi may attempt to mollify his critics on the Governing Council by dispensing with the option of expanding the size of the programme once again if „evolving data“ justify this by mid-year. In this way, extreme options are gradually being excised from the bank’s communication. The monetary authorities will have to deliberate more closely on the future shape of the APP in mid-year in any case. In this context, we are not assuming that Team Draghi will wind down their bond purchases overnight in September; what seems more plausible to us is that the monthly pace of purchases will be slowed further before the programme is finally shut down at the end of the year. The dose, in other words, is going to be gradually reduced; but the ECB will adhere to its sequencing strategy – a key-rate move is not going to be on the ECB’s agenda in the foreseeable future. During 2018 and beyond, we will witness a process in which the ECB gradually moves away from net purchases, with forward guidance on policy rates moving onto the front burner along with the accumulated stock of acquired assets.