Just three weeks into the European Central Bank’s 19-month bond-buying programme, analysts are already speculating that it may throttle back the pace of purchases early, possibly even this year.
An upturn in growth or inflation, a dramatic rise in asset prices and a scarcity of bonds have all been cited as factors that could prompt the ECB to ‘taper’ its purchases.
“We expect the ECB will decide to cut back its bond purchases as early as the second half of this year,” said DZ Bank analyst Hendrik Lodde, adding the economy could improve towards year-end.
When ECB president Mario Draghi unveiled the €1 trillion quantitative easing programme on March 5, he said the bank would buy €60 billion of bonds a month until September 2016 or until inflation is back on a path towards the bank’s target of close to but below 2 per cent. Markets were fuelled by the belief that this meant the programme could go on for longer than the stated duration.
ECB insiders say that so far there has been no discussion among policymakers of tapering QE and Draghi told the European Parliament last week he believed a recovery in inflation depended on full implementation of the programme.
Some analysts say evidence of the tapering debate may at some point emerge in the minutes, or accounts as the ECB calls them, of its policy meetings, the latest of which are published tomorrow.
We expect the ECB will decide to cut back its bond purchases as early as the second half of this year
Minutes of the January 22 meeting, at which QE was launched, already showed division over QE. Most policymakers voted for immediate action, though some said such a step should only be taken in “contingency” situations. Unlike the QE programmes initiated by the US Federal Reserve in 2008 and the Bank of Japan in 2013, the ECB’s has been launched with a ‘tailwind’ of improving economic data.
On launch day, the ECB lifted its growth forecast to 1.5 per cent for 2015, from a previous 1 per cent and said inflation would rise from zero this year to 1.8 per cent in 2018.
Since then, eurozone data has generally beaten forecasts. Business activity this month was its highest since May 2011, and inflation is expected to nudge back into positive territory after months of declines.
“I think that the ECB could consider tapering before September 2016 if it was really convinced that it no longer needs QE to achieve a return to price stability (lower but close to 2 per cent) on a sustained basis,” said Francesco Papadia, a former ECB director general for market operations.
“However the hurdle to take such a decision will be at least as high as the hurdle to decide on QE,” he added, as tapering before the due end date would be an effective tightening of policy compared with market expectations.