ECB Meets to Decide Path of Giant Stimulus Program--What to Watch

By Tom FairlessFeaturesDow Jones Newswires

It is decision time for the European Central Bank. After months of deliberation, the bank is finally expected on Thursday to unveil the fate of its giant bond-buying program, known as quantitative easing or QE. The decision has sweeping repercussions for global investors because the EUR60 billion-a-month ($70.57 billion) purchase program has underpinned the eurozone economy and financial markets since its launch in early 2015.

Now, 2 1/2 years on, the need for such an aggressive stimulus is less clear. The eurozone economy is accelerating, unemployment is falling sharply, and consumers and businesses are buoyant. The Ifo index of German business sentiment hit a record high on Wednesday.

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Still, no one expects an abrupt halt to QE, which is currently due to run through December. The ECB will unveil its plans in a policy announcement at 07:45 ET on Thursday, and ECB President Mario Draghi could give further clues at a news conference 45 minutes later.

What is the ECB expected to decide?

A third straight extension of QE--but at a greatly reduced pace. While economic growth is picking up across the 19-nation eurozone, inflation continues to undershoot, and economic risks are also lurking, for instance in Catalonia. The ECB is therefore expected to play it safe, with a nine-month extension of QE at around EUR30 billion a month, pushing it through to September 2018. A six-month extension at EUR40 billion-a-month is also possible, but that might be too short, particularly since Italy will hold national elections by May.

Will that be the end of QE?

This question has split the ECB's rate-setting committee. Keeping open the option of a fresh extension could help guard against future shocks, such as political turbulence or a change of course by the Federal Reserve. It would also keep a lid on the euro currency, which has risen sharply this year. But some ECB officials, notably the German contingent, want to signal clearly that QE won't last forever. On balance, the ECB is likely to opt for caution, giving no fixed end-date and reiterating that it stands ready to scale up QE again if necessary.

Can the ECB find enough bonds to buy?

It could be tight. Under the current rules of QE, the ECB could find another EUR300 billion or so of bonds next year, according to people familiar with the matter. ECB officials have shown little appetite to change the rules, which are designed to defuse legal challenges in Germany. Mr. Draghi might explain how the ECB could overcome any shortages, by tilting away from government bonds and toward corporate debt for instance. But such details may be delayed until December.

Gross or net?

To ease concerns over a reduction of QE, Mr. Draghi might underline the ECB's commitment to reinvest the proceeds of its maturing QE bonds for the foreseeable future. He might put a figure on those monthly redemptions, which analysts expect to average around EUR10 billion to EUR15 billion a month next year. Or he might lay out which bonds the ECB will target for reinvestment, such as those with longer maturities. Playing up the bank's gross bond purchases would highlight how the ECB is only exiting QE slowly.

What about interest rates?

Scaling down QE sets the ECB on a path toward higher interest rates, but the bank will probably stress that it is some way from actually raising rates. A nine-month extension of QE would probably push back the date of a first ECB rate increase into 2019, helping to hold down government bond yields and the euro currency. Some analysts had expected the ECB to soon increase its deposit rate, currently below zero, soon to ease pressure on the region's banks. Such a move now looks unlikely, however.

Write to Tom Fairless at

(END) Dow Jones Newswires

October 26, 2017 00:14 ET (04:14 GMT)