The ECB will extend its bond purchases beyond March and consider sending a formal signal after its policy meeting next Thursday that the programme will eventually end, senior sources with direct knowledge of discussions said.
Even some sceptics of more stimulus on the bank’s Governing Council have accepted that an extension beyond the current expiry date of March is inevitable given weak underlying inflation and heightened political risk, they said.
They are still wrestling with the question of how to structure that extension, however, according to multiple senior sources at the European Central Bank and national central banks.
Much of the preparatory staff work has focussed on a six-month extension at a steady pace of 80 billion euros (67.61 billion pound) per month, an option favoured by many as growth is sluggish, inflation lacks momentum and political risk from key elections keeps the chances of market volatility high, three sources said.
But some have indicated they would favour an extension at lower volumes, for example nine months at 60 billion euros a month, fearing that a straight extension could make the programme appear open-ended, two of the sources said.
A compromise under discussion would be to signal the programme’s eventual end, possibly in the bank’s forward guidance, indicating that the purchases cannot be extended indefinitely.
Another option is not to specify monthly purchase volumes, essentially making them dependent on economic developments, the sources said. That would allow the ECB to buy up to 80 billion euros without requiring it to spend the full amount.
“Coupled with the extension, there’s a sense that you need to send a signal, also for the hawks, that we will not be in the QE (quantitative easing) business forever,” one of the sources said. “We’re not talking about tapering. We’re talking about a signal.”
Another source from a country that is not seen to be in the hawk or dove camp said he estimated there was a majority on the council in favour of sending such a signal.
With tensions running high after around 1.4 trillion euros of bond buys, such a compromise would be an important concession to conservatives like Germany, the euro zone’s biggest economy, which has been outvoted in key decisions, leading to tension between Berlin and the Bank.
Some proponents of the extension fear an ill-timed signal about reduced buying in future could heighten market volatility, potentially undoing some of the benefits of the scheme.
The sources noted that no decision has been made, that the ECB board proposals for the Dec 8 meeting have not been sent to the euro zone’s 19 central banks and that the ultimate outcome could be different than the scenarios outlined above.
The ECB itself declined to comment.
Its “quantitative easing” asset-buying programme, begun in March 2015 to fight off the threat of deflation, has already been extended and enlarged as diving oil prices dragged inflation into negative territory.
The ECB has missed its target for achieving an inflation rate of below but close to 2 percent for more than three and a half years and fears that its credibility would be damaged if it gave up the fight.
The measures are likely to be presented in a package with several changes, including a tweak of the bank’s forward guidance. The bank is expected to continue promising exceptionally low rates for an extended period.
Inflation has risen sharply in recent months and will comfortably exceed 1 percent by early next year, supporting calls by conservative policymakers for the ECB to take its foot off the accelerator.
But nearly all of the increase comes from past oil price falls getting knocked out of data, suggesting the rise is due to statistical factors and not an indicator of returning inflation.
“There is no movement whatsoever in core inflation,” one of the sources said. “But there is very little space left for monetary policy.”
Still, initial 2019 inflation forecasts due next week will be at or near target, the ECB has said, indicating that the inflation trajectory continues to point up.
Extending the asset buys would require the ECB to ease some of its self-imposed restrictions, a sensitive debate as most options on the table raise legal or political concerns, facing varying degrees of opposition within the Governing Council.
Still, ECB President Mario Draghi seemed to dismiss those concerns this week, arguing that the programme was sufficiently flexible, suggesting that parameter changes would not stand in the way if policymakers opted for the extension.
Indeed, arguing that growth stalling was the biggest risk to the euro zone economy and “very substantial” stimulus needed to be preserved, Draghi has sounded a dovish tone recently, backing expectations for more stimulus.
Source: Reuters (By Noah Barkin , John O’Donnell and Balazs Koranyi, Editing by Hugh Lawson)