ECB debating the end of the purchase programme – a surprise?

In the last two trading days some market participants were obviously surprised by information initially coming from internal ECB sources, according to which the debate about the end of the asset purchase programme would start at the forthcoming meeting of the Governing Council and indeed that decisions might even be taken there and then. The rumours were accompanied by comments from ECB hawks Klaas Knot and Jens Weidmann who would regard an end to the programme scheduled by the end of the year as a sensible move – a tactical manoeuvre ahead of radio silence which precedes the actual meeting. However, even the ECB’s chief economist Peter Praet has been blowing the same trumpet in so far as he has indicated that he regards the ECB’s criteria for the path of inflation (namely convergence, confidence and resilience) as having been met, and that the Governing Council would have to start the discussion about starting to unwind asset purchases. It seems that some market participants were of the view that because of the recent sharp rise in uncertainty brought about by Italy and the trade dispute,  the ECB would at least hesitate, if not  shrink back entirely from ending its purchase programme.

Unquestionably, because of the markets‘ dependence on the purchase programme − a dependence of the ECB’s own making − the European Central Bank practises a monetary policy of „homeopathic“ steps towards a traditional interest-rate policy. However, it has been clear for quite some time that the ECB would have to get to grips with the future of the purchase programme in June and July. From a purely organisational point of view, the debate on the issue of unwinding the programme  had to begin before the summer break in August because the timeframe thereafter for discussion and subsequent communication is too tight − after all, the current programme comes to an end in September. In addition, it is also clear that the ECB has to pull out of the programme quite simply because it is running out of eligible assets to purchase. The self-imposed limits for issuers and bond limits have almost been reached in the case of Finland, the Netherlands, Ireland, Spain, Portugal and Germany, for example, and therefore the programme can no longer be carried on effectively for much longer. In terms of impact, a more moderate pace in matters of expansionary monetary policy also makes sense since deflation risks have long since vanished. If we look at the evolution of figures such as inflation futures rates, super core inflation or even the service component in the most recent HICP figures for the eurozone, then it is clear that there is no hint of any slump in spite of the risks surrounding Italy and increasing clarity about the end of the purchase programme; in fact, the figures have remained on an uptrend, albeit a very moderate one. To that extent, Mr. Praet has merely confirmed the obvious. As regards Italy, the ECB is likely to appear demonstratively unconcerned; after all, the yields of Italian sovereign bonds are far from real crisis levels. In any case, the ECB may not and will not say anything openly to help a country which introduces expansionary fiscal measures in its government programme. In addition, outgoing ECB Vice President Vitor Constancio recently also indicated that OMT criteria were available to download from the Central Bank’s website at any time.

Accordingly, the ECB appears self-confident at the moment and is sticking to its course of gradually unwinding its ultra-expansionary measures. For this reason, the debate in June − based on higher projections − is likely to lead to a renewed adjustment of the forward guidance which will dissolve the conditionality between the continuation of asset purchases and the inflation trend. This would then have to be understood as an unmistakable signal that the central bankers will communicate a final decision about the future of the asset purchases at the latest at the July meeting of the Governing Council, as was also the case when they last adjusted the purchase programme. The ECB therefore still has a little time during which to observe how data are evolving against the background of the current uncertainties. With the end of the purchase programme at the end of the year, the focus of communication will then increasingly shift towards the reinvestment of assets and the ECB’s interest rate policy. The ECB will remain cautious and merely react, sticking thereby to two sets of three guiding principles, namely convergence, confidence and resilience on the one hand, and patience, persistence and prudence on the other.

 

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