Five Questions for Thursday's European Central Bank Meeting

By FeaturesDow Jones Newswires

The European Central Bank could be enjoying a rare period of calm, after announcing a major reduction of its stimulus in October. Instead, the bank's top officials have started squabbling publicly over their next move.

The reason for the dispute is the eurozone economy, which is in its strongest shape in more than a decade. Some officials want to send a clear signal that the bank will soon wind down its EUR2.5 trillion ($3.1 trillion) bond-buying program, known as quantitative easing, or QE. Otherwise, the bank could be forced into more abrupt action in the future as the economy heats up, potentially triggering a recession. Other officials are more cautious, worried about weak inflation and a rising euro.

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European Central Bank President Mario Draghi might give fresh insights into the debate at his first public appearance of the year, after Thursday's policy meeting. Here are five questions about ECB policy and Thursday's meeting.

What is the ECB likely to do this week?

Nothing, yet. But Mr. Draghi might hint at coming changes to the bank's guidance to investors. Currently, the ECB pledges to continue QE until inflation approaches its target of just below 2% -- and to increase the program if the economy deteriorates, an event that now seems unlikely. The latter pledge could be dropped, possibly this week.

What will happen to QE after September?

Mr. Draghi has indicated that QE won't end abruptly after September, its current end date. But other ECB officials have cast doubt on that claim, suggesting it hasn't been agreed to by the bank's rate-setting committee. Any change to Mr. Draghi's language would be significant, because it affects the timing of the ECB's first interest-rate increase.

What's the ECB's next move?

Analysts expect the ECB to signal soon that QE will end this year, and to shift its focus toward interest-rate increases. That change is widely expected in March, when ECB officials will have new staff economic projections. The bank might formally announce an end date for QE a few months later, perhaps in June.

When will the ECB raise interest rates?

Investors are pricing in a 40% chance that the ECB will raise interest rates this year, according to Mike Bell, global market strategist at J.P. Morgan Asset Management. Many analysts think that timetable is too aggressive, given the ECB has promised not to raise rates until "well past" the end of QE. Still, the bank's officials seem eager to end their emergency measures soon, and those include negative interest rates.

What about the euro?

The single currency has surged against the dollar in recent weeks, hitting $1.24, its highest level in more than three years. That partly reflects the strengthening eurozone economy, but policy makers worry about sudden moves: A strong euro tends to weigh on exports, economic growth and inflation. Several ECB officials have expressed concern about the euro in recent days. Mr. Draghi might indicate whether the euro's rise could upset the bank's exit plans.

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

(END) Dow Jones Newswires

January 25, 2018 00:14 ET (05:14 GMT)

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