If someone were to codify the eternal laws of central-bank communication, one of them might go something like this: own the dialog with the market or the market will own it for you.
Having spent Thursday afternoon trying to give as little information as possible about one of the most important questions in global monetary policy — how the European Central Bank will extend, adjust or wind down its program to buy 80 billion euros ($88 billion) a month of debt — President Mario Draghi has set himself up for another exercise in expectation management at the next meeting on Dec. 8.
The ECB finds itself in a period of unusual uncertainty for central banking worldwide, forcing it into an almost impossible choice between laying open its internal debates or proclaiming a definite path ahead. Even though Draghi signaled that QE won’t come to an “abrupt” end, investors in the weeks ahead will still have to take bets on a wide range of parameters for the next steps.
“They put a lot of pressure on themselves and on us for the December meeting,” said Holger Sandte, chief European analyst at Nordea Markets in Copenhagen. “Markets are pretty dependent on their drugs, so to get out is difficult. There’s a big communication challenge here.”
Speaking after the Governing Council left its stimulus strategy unchanged, Draghi said that “sometimes it’s important to say what we did not discuss.” The topics deemed out of bounds included future rate cuts, extending bond-buying and tapering the program — or even whether those topics will be on the December agenda.
The ECB has pledged that by its next meeting, it’ll complete a three-month technical examination into how to ensure the central bank can keep buying bonds amid increasing scarcity. That set of decisions could see officials scrap a self-imposed prohibition on buying bonds yielding less than the deposit rate of minus 0.4 percent, change the regional distribution or allow themselves to buy more of any given issuance.
Those considerations, while technical, are related to the question of whether the ECB’s inflation outlook requires it to prolong buying beyond the provisional end-date of March 2017. Then policy makers would have to agree on how long they continue purchases and at what pace.
Some investors are acting on the hunch that most if not all of these parameters remain open. The fact that the crunch meeting is less than two months away means a wide range of expectations might build that must be either confirmed or disappointed.
“Maybe he’s not signaling anything precisely because they are really trying to think,” Alessio de Longis, a New York-based money manager in OppenheimerFunds Inc.’s global multi-asset group, told Bloomberg Television. “They might be at a point where they really want to assess the broader impact of policy.”
As Draghi noted, the eventual decisions will also be affected by global economic and political uncertainty that pose “downside risks” to the currency bloc. Convergence of inflation back toward the target of just under 2 percent must be “sustainable and durable.”
The one glimmer of certainty he offered Thursday was his personal view that it’s “unlikely” quantitative easing would come to a sudden stop. The comment was in response to a question on whether the ECB might taper the program, or gradually wind it down. Bloomberg reported on Oct. 4 that policy makers had built an informal consensus to do so when the time comes to conclude QE.
Even if the ECB had the luxury of making policy in a vacuum, judging what will happen at the end of the year would be taxing enough. But as the president noted, there are still a host of risks to the European economy. Those include the potentially delayed impact of the U.K’s decision to leave the European Union, and any fallout should reformist Italian Prime Minister Matteo Renzi lose a constitutional referendum on Dec. 4 — just four days before the ECB’s next meeting.
“The timeline now is pretty clear: the ECB will continue to buy for quite some time, markets should be reassured, but there may be a lot of obstacles along the way,” said Philippe Gudin, chief European Economist at Barclays Plc in Paris. “The major sources of uncertainty do not come from the ECB. If we have an accident, and that is quite possible, then they could go for longer. The situation now is very, very open.”