Investors Brace for Clues on ECB Tapering

By Tom Fairless Features Dow Jones Newswires

The European Central Bank is preparing to close off the money taps, and global investors are on the edge of their seats.

Continue Reading Below

Financial markets seesawed last month after ECB President Mario Draghi signaled that the bank might soon scale back its EUR60 billion ($69.3 billion) a month bond-buying program, known as quantitative easing, as the eurozone economy accelerates.

Mr. Draghi has a chance to expand on that idea on Thursday, when he faces the cameras after the ECB's policy meeting. Investors will watch closely for hints as to the bank's moves after December, when QE is currently due to end. The details of the ECB's exit strategy matter hugely for asset prices, interest rates and the euro currency.

Here are key questions ahead of the central bank's policy release, due at 1145 GMT (7:45 a.m. EDT).

What is expected from the ECB on Thursday?

Taper tips. According to Mr. Draghi, ECB officials haven't yet discussed winding down, or tapering, their bond purchases. If a first discussion took place this week, that would be a strong signal that an announcement on tapering QE is imminent--perhaps after the ECB's next policy meeting on Sept. 7. Concrete details will probably have to wait, however. Mr. Draghi is also likely to soothe markets by emphasizing that any policy change will be gradual.

Continue Reading Below

How strong is the eurozone economy?

It is in its best shape since before the financial crisis. After outpacing the U.S. in the first quarter, the bloc's economy might have grown by 3% on an annualized basis in the three months to June--the fastest pace in around a decade. Unemployment is falling, and consumer and business sentiment indicators are at multiyear highs.

So why not reduce the stimulus now?

Because the indicator that the ECB actually targets--inflation-- is still too weak. Policy makers don't fully understand why strong growth has yet to feed through to consumer prices, which rose only 1.3% on the year last month. But in a crucial shift, Mr. Draghi has suggested that ECB officials may be willing to overlook that weakness because they are confident that inflation will pick up over time.

What else might the ECB do?

Mr. Draghi might announce an internal review into different exit strategies. The most obvious plan would be to reduce QE by EUR10 billion a month from January, following the example of the Federal Reserve, but many analysts expect staggered EUR20 billion reductions at three-month intervals. The ECB chief might also clarify how soon interest rates will rise after the end of QE. And the ECB might drop its pledge to accelerate QE if the economic outlook darkens, though that is unclear.

What could go wrong?

A lot. Officials are wary of repeating the Fed's policy error four years ago, when it triggered a "taper tantrum" in financial markets by signaling the end of its own QE program. A surge in interest rates and the value of the euro could stop the region's long-awaited recovery in its tracks. That is why Mr. Draghi is expected to stress the need for patience and prudence.

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

(END) Dow Jones Newswires

July 20, 2017 00:14 ET (04:14 GMT)