The October European Central Bank (ECB) meeting will be the subject of much speculation, with the bank’s monetary policy path becoming less predictable. The last meeting saw Mr Draghi seemingly admit the bank may have to reshape its policy just to maintain the same amount of stimulus. This highlights that, largely, the bank is running out of options.
Super Mario’s powers may be fading and unfortunately no eurozone country is going to have him tell them when and how much fiscal expansion is undertaken. Rumours the ECB is planning to taper quantitative easing (QE) may have been refuted, but this perhaps highlights the fact we appear to be planning as much for cushioning markets ahead of monetary tightening than planning for further easing.
Of the options available to the committee, perhaps the most straightforward would be an extension to the current asset purchase programme, which currently runs until the end of March 2017. However, the issue we are seeing is the current list of assets eligible for purchase by the bank is small and shrinking, bringing about the need to reconsider what and from where the ECB buys assets.
The most likely outcome of this month’s meeting is we will see the bank hold off until the committee reconvenes in December. We have not seen a significant deterioration in data since the last meeting and with global inflation on the rise, there is reason to believe the ECB will hold back what little ammunition it has left until another time. December sees the latest staff forecasts, which Draghi would likely utilise as a means to dictate any policy shift.
If we do not see any move from the ECB this month, much of the focus will be upon the Q&A as a source of volatility. Likely topics to watch out for include the rumours of tapering which while denied, will likely have some form of origin in reality. The committee is unlikely to want an abrupt end to the QE programme and as such the idea of tapering asset purchases towards the end is not necessarily such an outlandish thing to discuss. It does not mean it will taper into March 2017, but it may mention the plan to taper when/if it decides to extend the timeline.
Another issue to watch out for is arising from the fact asset purchases are done according to the ‘capital key’. This means the amount of assets bought from each member state will depend on their economic size. Initially this is fine, yet over time the assets for some of those major economies (like Germany) become scarce and the programme becomes unsustainable.
As ever, Mr Draghi will try to make this an interesting affair for markets, bringing about the potential for a left-field comment or decision. The most likely outcome is the committee stays put and holds off until December. However, given this widespread market expectation, a decision to make the move now would likely catch markets off guard, thus making a proportionately larger move.
In either case, the days of bazookas seem to be over and perhaps with it the widespread selling of the euro could begin to unwind.