ECB set to tee up next stimulus move: analysts

Mario Draghi

Mario Draghi, ECB boss, is looking to end the 'taper tantrum'. [ECB European Central Bank/Flickr]

European Central Bank chief Mario Draghi is likely to prep markets for an extension of a huge monetary stimulus programme later today (20 October) after investors were rattled by talk that massive bond purchases may be drying up.

Policymakers at the European Central Bank are not expected to make changes to the bank’s record low interest rates, cheap loans to banks, or 80-billion-euro-per-month asset-buying programme at this week’s governing council meeting.

But markets will be watching Draghi’s news conference closely for signs of its next moves to support hesitant growth and inflation in the eurozone single currency area.

Investors were spooked by a Bloomberg report in early October suggesting that the ECB was considering “tapering” – or gradually phasing out – its “quantitative easing” asset-buying scheme which is due to end in March.

While the bank strongly denied the report, the ensuing “taper tantrum” pushed up bond yields and served as a reminder of how volatile sentiment regarding the currency bloc’s prospects remains.

With little sign of governments responding to Draghi’s repeated calls to use growth-boosting fiscal policies to complement his monetary interventions, the ECB’s ultra-loose policy remains a critical pillar of confidence in the 19-nation eurozone.

“It is too soon for the ECB to provide any guidance on its exit strategy,” economist Florian Hense of Berenberg bank said, as it “wants markets to focus on a likely extension of its purchase programme”.

Decision in December

Most central bank observers expect Draghi to hold off until December to announce any policy changes aimed at bringing inflation closer to the ECB’s mandated target.

Inflation reached its highest level in almost two years in September, at 0.4%, but remains far off the ECB’s objective of just below 2.0%.

But the bank believes that without its help, economic performance would be even worse.

ECB launches corporate bond buy in attempt to revive inflation

The European Central Bank started buying corporate bonds on Wednesday, picking up utility, insurance and telecom papers, as part of its latest effort to revive rock-bottom inflation by getting companies to borrow and spend.

Minutes released in early October from September’s governing council meeting showed members agreed it was “of crucial importance to preserve the very substantial degree of monetary support” – and little has changed since then.

A study the ECB released this week showed increased demand for credit from businesses and households and banks softening conditions for offering loans and for their repayment — positive developments which the council will see as the result of its interventions.

“We think the ECB will likely act again in December, when it has new staff projections to hand” of future growth and inflation, Morgan Stanley analyst Elga Bartsch said.

Rather than announcing changes, Draghi “should make clear that the ECB is still willing, able and ready to intervene again if necessary”, a mantra he has stuck to at recent press conferences, Natixis bank economist Johannes Gareis said.

In September, the governing council tasked “relevant committees” to examine ways the ECB can avoid running out of bonds to buy, allowing it to continue pumping money into the financial system and encouraging lending.

Its own rules prevent the ECB from buying bonds with a yield below the rate of interest it pays on deposits, currently -0.4%, and from buying too many from any one issuer – a bulwark against potential accusations of “monetary financing” of government spending.

Loosening those rules could be a sign the bank is giving itself space to continue quantitative easing by making more bonds eligible to buy.

Bump road ahead

With several potential political upsets on the calendar in November, including the US presidential election and a constitutional referendum in Italy which Prime Minister Matteo Renzi has staked his job on winning, analysts expect the ECB will want to conserve its strength for now.

Meanwhile, financial markets are eyeing the possibility of the US Federal Reserve raising its own interest rates, potentially driving up yields on European bonds.

And lurking in the background is the as-yet-unquantifiable damage to eurozone economies from Brexit.

The island nation was the eurozone’s second-largest export customer after the United States in 2015, according to Eurostat data, buying 13.5% of the currency bloc’s goods sold abroad.

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