Draghi May Address Future of ECB Stimulus at Jackson Hole -- 2nd Update

By Tom Fairless Features Dow Jones Newswires

European Central Bank President Mario Draghi is scheduled to address the Federal Reserve's Jackson Hole conference in August for the first time in three years, according to a person familiar with the matter, in a speech that is expected to give a further sign of the ECB's growing confidence in the eurozone economy and its reduced dependence on monetary stimulus.

Continue Reading Below

The future of the ECB's EUR60 billion-a-month ($68.5 billion) bond-buying program, which is currently due to run through December, is one of the biggest questions hanging over global markets.

ECB officials say the bank is likely to signal at its Sept. 7 policy meeting that the program, known as quantitative easing, will be gradually wound down next year.

Mr. Draghi's speech in Wyoming will take place less than two weeks before the ECB's September policy meeting, and will provide an obvious opportunity to signal a policy shift before the blackout window closes a week ahead of the meeting.

His last speech at Jackson Hole in August 2014 was widely seen as heralding the start of the ECB's bond-buying program, known as quantitative easing or QE. Signaling the end of the program at the same event would have a certain symmetry, a person familiar with the matter said.

ECB officials caution that the timeline could yet change if economic data turn out weaker than expected. They will gather in Frankfurt on July 19-20 for the ECB's next policy meeting, but aren't expected to announce any major changes yet.

Continue Reading Below

The euro rose as much as 0.4 cent against the dollar, to $1.1418, and 10-year German government bond yields jumped to 0.59% from 0.55%. Yields rise as prices fall.

Mr. Draghi could use a speech in Jackson Hole to prepare investors for a policy move in September, when ECB officials will have new forecasts of Eurozone growth and inflation, said Marchel Alexandrovich, an economist at Jefferies in London. The ECB typically waits for a fresh set of forecasts, which are published quarterly, before changing its policy mix.

Any move to wind down QE will test the strength of the eurozone economy, with less central-bank support to spur spending and investment by households and businesses.

The Jackson Hole symposium, organized by the Kansas City Fed, is an invitation-only event that draws top central bankers and economists from around the world to discuss monetary policy issues behind closed doors. This year's conference will take place from Aug. 24-26. The list of speakers won't be published until shortly before the event begins.

ECB officials say the most likely scenario is for the bank to reduce QE by EUR10 billion a month, starting in January. That would follow the pace of the Federal Reserve, which wound down its own QE program three years ago.

ECB officials have been tight-lipped in public about the future of QE after December, as they are wary of triggering an adverse market reaction that could upset the region's recovery. A hint from Mr. Draghi last month that QE could soon be wound down was enough to roil financial markets and send the euro soaring against the dollar.

If the ECB does change course and starts to reduce its stimulus program, it would realign the policies of the world's two most powerful central banks for the first time in almost four years. The Fed wound down its own QE program in 2014 and has been nudging interest rates higher since December 2015. Fed Chairwoman Janet Yellen indicated on Wednesday that that process would continue.

The ECB's bond purchases have helped reinvigorate growth across the 19-nation currency union since it was launched in early 2015. But has been attacked by officials in Northern Europe for subsidizing governments and hurting savers and pensioners.

The need for aggressive stimulus has lessened as the eurozone economy has picked up speed. Unemployment in the region has fallen to an eight-year low of 9.3%, growth is accelerating across the 19-nation bloc, and business and consumer confidence indicators are at postcrisis highs.

Given that improvement, many analysts expect the ECB to announce the future of QE at its policy meeting in September or October, and start winding down the program early next year.

Even so, investors appeared to be taken off-guard when Mr. Draghi indicated in Portugal last month -- at the ECB's own version of Jackson Hole -- that the bank would reduce its stimulus as the region's economy accelerates. Eurozone government bond prices have slumped and the euro has risen 2 cents against the dollar since the speech, as investors prepare for the departure of a giant buyer.

The dilemma for the ECB is that, while growth is accelerating, inflation -- the bank's real target -- remains too weak. It slid to 1.3% last month, some way from the ECB's target of just below 2%.

With that weakness in mind, some top ECB officials have recently called for patience. Peter Praet, the bank's chief economist, said last week that the ECB should maintain "a steady hand" to ensure that inflation picks up. "Our mission is not yet accomplished," he said.

In an interview on Monday, Greek central-bank governor Yannis Stournaras said it wasn't yet time for a policy shift. Still, "this could change," Mr. Stournaras said. "We meet every month."

One reason to end QE soon is that the ECB is expected to struggle to find enough bonds to buy later next year. Changing the parameters of the QE program, which allow the ECB to purchase only up to 33% of any Eurozone government's debt, could prove legally and politically tricky. Economists also worry increasingly about a buildup of financial risk after years of ultralow interest rates.

Write to Tom Fairless at tom.fairless@wsj.com

(END) Dow Jones Newswires

July 13, 2017 11:45 ET (15:45 GMT)