What to expect from Mario Draghi about the EU economy and QE

The European Central Bank president opened a debate about the future path of stimulus on Wednesday after the Governing Council was presented with various scenarios for winding down asset purchases, according to people familiar with the matter.

For months, Draghi put off a discussion, concerned about low inflation and wary of market turmoil at any hint of an exit. Now, as the risk increases that leaving a decision too late makes investors jumpy, the challenge is to find a way to begin dialing down quantitative easing while providing assurance that any moves will be gradual.

In starting the debate on policy normalization, Draghi followed through on a July pledge to start talks in the fall. Still a formal announcement on the next step may not come before the October meeting.

“They are entering a decision-making phase,” said Bjoern Eberhardt, head of global macro analysis at Credit Suisse in Zurich. “There are a lot of aspects that need to be looked at -- there’s also the problem of bond scarcity, which will become an issue towards the middle of next year.”

The ECB will announce its decisions on interest rates and asset purchases at 2:45 p.m. Bulgarian time on Thursday. With economists predicting no change in those instruments, the focus will be on any alteration to forward guidance. Draghi will speak to reporters 45 minutes later, when he’ll elaborate on the decision and reveal updated economic forecasts.

Yet, inflation is struggling to follow the upswing. At 1.5 percent in August, that’s still short of the central bank’s goal of just under 2 percent, and neither underlying price pressures nor wages are showing much of a pickup.

One particular area of concern is the exchange rate. The euro’s gain of almost 6 percent this year in trade-weighted terms, and more than 13 percent against the dollar, puts downward pressure on inflation and also threatens to weigh on exports.

While economists surveyed by Bloomberg remain reasonably confident on the growth outlook, half of them foresee downward revisions to the ECB’s price outlook for next year.

“The question is whether a shortage of bonds in some markets will turn into outright scarcity, and how best to address this problem,” said Marchel Alexandrovich, an economist at Jefferies in London. “Given that some ‘soft’ adjustments of the program have already been taking place and markets have not taken much notice, this should give the ECB reassurance that perhaps this is the way to carry on in 2018.”

Source: Bloomberg Pro Terminal

Jr Trader Petar Milanov

Bloomberg Post: Draghi Kicks Off QE Exit Debate He Has Long Sought to Avoid

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