Traders are eagerly anticipating Thursday's meeting of the European Central Bank (ECB), with some contemplating whether President Mario Draghi's actions could radically reschedule when the central bank's first rate hike could come.
Back in July, Draghi said that discussions regarding a change in monetary policy stance will begin in the fall. In September, he then indicated that the bulk of the decisions regarding the asset purchase program are likely to be made in October. With autumn leaves now lining the streets, markets are expecting the "fall" decision to come this Thursday.
Herein lies the challenge. What can the ECB do that will simultaneously:
- Keep the doves happy (including Draghi himself who has said that considerable stimulus may still be needed to get inflation back up to 2 percent)
- Placate the hawks who are getting nervous about too much accommodation backfiring
- Keep peripheral yields pinned (especially given the Catalan backdrop and Italian elections next year)
- Ensure that the market doesn't materially bring forward the timing of the first rate hike which would then cause an unwarranted appreciation in the currency
- Avoid running into any (self-imposed) technical constraints due to the limited supply of bonds left in the universe for the ECB to buy, particularly pronounced in Germany.
It's no easy task. Which is why the compromise may be that the asset purchase program — which is set to expire in December — is extended into the latter half of next year but with a much smaller monthly net purchase amount. (Gross purchases will stay positive as the ECB re-invests the proceeds it gets from buying debt, which will average about 15 billion euros per month in 2018).
The central bank has remained ultra-accommodative in the years since the global financial crash and the euro zone sovereign debt crises, and also introduced U.S.-style quantitative easing (QE) — buying assets to stimulate lending — which is used to stoke inflation and boost the economy.