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Financial News: ECB's Draghi To Unveil 'Lower For Longer' Tapering

ECB's Draghi To Unveil 'Lower For Longer' Tapering

10/25/2017 - 10:59:00 (RTTNews)

(RTTNews) - Everyone is waiting with bated breath for the conclusion of the European Central Bank's policy session on Thursday following which the bank's chief Mario Draghi is expected to announce a gradual reduction in the massive monetary stimulus as the euro area economic growth gains momentum.

Anything less than a move on a gradual reduction in the stimulus next year would come as a surprise that could unnerve markets, something that the ECB policymakers are keen to avoid. Recent rhetoric suggest that there is unanimity in the Governing Council regarding the trimming of asset purchases.

While a dovish Draghi may omit the word "tapering" in his statement to cause as little hype as possible, the process of trimming the monetary stimulus is most likely to be in several phases as policymakers have already signaled that asset purchases cannot be stopped abruptly.

The question remains as to how much the bank will reduce the asset purchases and how long will it take to wind down the entire stimulus that is now running at EUR 60 billion buys a month till the end of the year.

"Even though inflation developments could easily argue in favor of not changing the monetary stance at all, the strong cyclical upswing together with the scarcity of bonds seems to be the primary driver for the ECB to announce first details of its tapering programme finally," ING Bank economist Carsten Brzeski said.

"Or, better describing the ECB's hesitance and caution not to scare financial markets: the recalibration of its monetary stance."

Economists widely expect the bank to extend its asset purchases at a reduced size till September 2018, hence the phrase in focus is "lower for longer". Some economists put a number on the monthly asset purchases - EUR 25-30 billion.

If this expectation materializes, it could be the second time that bank opts for such a move as it had reduced the size of monthly asset purchases in March this year from EUR 80 billion.

"That [reduction to EUR 25-30 billion] isn't even the start of an exit from a policy of easy money, since the share of government bonds held by the ECB will continue to rise next year," Commerzbank economist Joerg Kraemer said.

"Instead, the ECB needs an exit plan that also incorporates higher interest rates."

Draghi is also expected to keep the door open for increasing asset purchases if the outlook worsens and retain the bank's commitment to unchanged interest rate for a long time, thus stemming the upward pressure on the euro and bond yields.

In the June policy announcement, Draghi adjusted the forward guidance to drop the easing bias on interest rates.

Yet, an interest rate hike could be a very long way off. Draghi is likely to stress on policy "sequencing" asserting that an increase in interest rates would appear only after the end of asset purchases in 2018. That does not mean immediately afterwards, but sometime in 2019, some economists said.

The rate decision announcement is due at 7.45 am ET on Thursday in Frankfurt and ECB President Draghi is scheduled to hold his customary post-decision press conference at 8.30 am ET.

The main refi rate is currently at a record low zero percent and the deposit rate at -0.40 percent. The marginal lending facility rate is 0.25 percent.

Eurozone inflation was steady at 1.5 percent in September and the policy-relevant core figure eased marginally to 1.1 percent.

Inflation has stayed away from the ECB's target of "below, but close to 2 percent" for quite some time. Price growth lost steam after energy prices cooled.

Meanwhile, the economy has been resilient expanding 0.6 percent in the second quarter after a 0.5 percent growth in the first three months of the year. Recent surveys and economic indicators suggest the momentum continued in the third quarter and is likely to gain strength in the final three months of the year.

Many hope that the tapering move expected to be announced on Thursday would be the beginning of the end of ultra-easy monetary policy since the 2007-08 global financial crisis that saw a daring Draghi test the limits of unconventional policy by taking deposit rates to negative territory and buying corporate and state debt.

A state of high political flux in the euro area was one of the main reasons that prevented the ECB from thinking in favor of tapering earlier this year. The German election proved to be a dampener, but is unlikely to materialize into a serious concern for the ECB.

Still, political threats to the Eurozone outlook linger, the latest being Catalonia independence referendum, but the ECB may have gained more confidence after riding out Brexit and elections in key euro countries, without much trouble.

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