While inflation in the euro zone is stubbornly underwhelming, European Central Bank President Mario Draghi and his team are expected to keep its policy steady in October and hint at more action in December at the central bank's last meeting of the year.
"The ECB is unlikely to unveil any policy changes at its forthcoming meeting October 20th. But we expect it to prepare the grounds for an extension of its asset purchase program to be announced at its following meeting in December," said Jonathan Loynes, chief European economist of Capital Economics in a note.
The ECB's massive 80 billion euro-a-month ($88 billion) bond-buying program is slated to expire by March 2017 and, despite fevered speculation, the vast majority of economists polled by Reuters expect an extension for quantitative easing beyond March 2017. The reason behind this is the euro zone's soft inflation outlook. Even the latest ECB's staff macroeconomic forecast sees inflation only slowly recovering to 1.6 percent in 2018, some way below the ECB's mandate to keep the rate at around 2 percent.
The ECB though faces an odd scenario: There are not enough assets available which they can purchase under the current set-up of its QE program if they were to extend it substantially beyond March 2017. By its own rules, the ECB can only buy debt that yields more than its -0.4 percent deposit rate and also is limited to a specific amount from any particular country. The recent rise in bond yields has given the bank some relief though.
"We maintain our view that raising the issue limit to 50 percent is the most likely option and we expect tapering to start in March next year, once headline inflation has climbed above 1 percent, with a reduction of asset purchases by 10 billion euros per meeting until January 2018", write Anatoli Annenkov, ECB-watcher at Societe Generale Oct 14.
Tapering and when it might start will be the big elephant in the press room on Thursday. Mario Draghi will most likely not go anywhere near the "taper" word. However, it is getting increasingly likely that 2017 will be the year in which the ECB will gradually scale down its easing policy.
"Maybe the most interesting development in recent weeks has been the verbal shift of several ECB members towards a more hawkish tone", writes Carsten Brzeski, chief economist for Germany and Austria .
"Other members warned against the unintended risks of maintaining interest rates too low for too long."
Macroeconomic data since the last meeting in early September has been largely better than expected, giving no ground to fears that the economy stalled in the third quarter. Also the ECB's preferred inflation gauge - the five-year, five-year breakeven forward - is trading around 1.41 percent, its highest level since June.
"Based on current economic development and outlook, there is no obvious case for additional easing, with headline inflation expected to rise strongly over the coming six months," Annenkov says.
