By Dhara Ranasinghe
London, Reuters – Mario Draghi’s last meeting as European Central Bank chief this Thursday may prove a lively gathering given a deep rift among policymakers over renewed asset purchases that threatens the effectiveness of policy.
After unleashing a wave of stimulus measures in September — including an interest-rate cut and a decision to restart asset purchases to boost the economy — no major announcements are anticipated.
“The biggest part of the meeting will be the farewell to Draghi,” said Pictet Wealth Management strategist Frederik Ducrozet. “This could be an emotional moment for him.”
At the same time deep divisions have emerged among policymakers over reviving bond purchases, meaning the ECB chief’s final news conference may prove a heated affair.
Here are five key questions for markets.
1. So, will the ECB do anything this week?
Economists predict no major changes to the ECB’s post-meeting policy statement given a broad range of stimulus measures unveiled at the Sept. 12 meeting.
They said technical issues regarding the restart of quantitative easing (QE) and the tiering of interest rates may be on the agenda.
Some expected Thursday’s meeting to be a largely ceremonial one to mark the end of Draghi’s eight-year term, which concludes on Oct. 31.
But the ECB is also likely to be asked about the impact of its last policy measures given low inflation expectations and concern that the central bank is running out of firepower.
The latest stimulus package will not significantly help bring inflation back to target, according to a Reuters poll of economists who said the risk of a euro zone recession in the next two years has increased. (Full Story)
Graphic: ECB’s Sept meeting measures https://fingfx.thomsonreuters.com/gfx/mkt/12/7569/7500/ECBSeptmeeting.png
2. The ECB’s board is deeply divided, what does this mean for policy?
Draghi is likely to be pressed about the rift within the ECB Governing Council although economists say this is now an issue for his successor Christine Lagarde.
An unprecedented split, which saw more than a third of policymakers including the central bank chiefs of France and Germany oppose the new bond purchases, threatens the effectiveness of ECB monetary policy.
For markets, the divisions have added to a perception that the ECB’s room for manoeuvre is limited. But senior officials such as Vice President Luis de Guindos have ruled out a policy U-turn and Draghi is likely to do the same.
“From Draghi’s point of view, he will say the discussions are important and there are differences but as long as there is a majority in favour, those policies are carried out,” said Anatoli Annenkov, senior European economist at Societe Generale.
“What is more important is the take of the next ECB president on the divisions but we’ll have to wait for her to take office to know that.”
Table below from Pictet Wealth Management.
ECB doves vs hawks https://fingfx.thomsonreuters.com/gfx/mkt/12/7566/7497/ECBDOVES1710.png
3. What about QE, could we get more details?
The ECB will restart QE in November with 20 billion euros of asset purchases a month. It may reiterate on Thursday that the scheme is likely to be broadly in line with the previous round, in which government bonds made up the bulk of purchases.
A question about QE is nevertheless likely to come up at the news conference, given the central bank has pledged open-ended asset purchases but may find this difficult to do without tweaks to its own rules on what it can own.
Two sources familiar with the process told Reuters the ECB will run out of German bonds to buy in just over a year under the current rules and would have to bend them to keep the scheme running longer, risking fresh internal and legal conflict.
Graphic: ECB’s QE programme https://fingfx.thomsonreuters.com/gfx/mkt/12/7567/7498/ECBQE1710.png
4. Could the ECB clarify its plans for tiering?
At its September meeting, the ECB increased its charge on bank deposits to -0.5% to protect the euro zone from a global economic slowdown. But it also granted an exemption from that charge on any deposit exceeding six times a bank’s mandatory reserves through a so-called tiered rate on deposits.
That has resulted in banks raising the rate at which they lend to each other over several months, anticipating that some cash will be withdrawn from the market and parked at the ECB when the new rate takes effect on Oct. 30. (Full Story)
If this persists, the ECB may have to reduce the amount of reserves subject to the exemption to prevent a rise in borrowing costs in the economy.
While tweaks to the policy are not anticipated prior to the launch, investors are looking for the ECB to perhaps clarify its intentions.
In bond markets, the tiering policy has been interpreted as inadvertent monetary tightening, dampening expectations for further rate cuts.
While many economists expect a December ECB rate reduction, money markets do not price in even a slim chance of 10 basis point cut ECBWATCH before 2020.
Graphic: Euro zone money markets https://fingfx.thomsonreuters.com/gfx/mkt/12/7568/7499/eonia1709.png
5. What will be the message from Draghi as his term draws to en end?
Draghi, who has steered the ECB through the euro zone debt crisis and the uncharted waters of QE, has ramped up his call on governments to use fiscal policy to boost the bloc’s long-term growth and inflation prospects.
Member states can help the ECB raise interest rates sooner if they loosen their own purse strings to support the economy, he said earlier this month.
This message may be repeated on Thursday but more likely, say analysts, the ECB chief will want to end his news conference on a positive note.
“Unfortunately Draghi won’t have a track record on inflation, but he does have one on employment growth,” said Societe Generale’s Annenkov. “His sign-off message is likely to be that things would have been much worse had the ECB done less.”
Graphic: Inflation, unemployment during the Draghi era https://fingfx.thomsonreuters.com/gfx/mkt/12/7558/7489/Draghi%20era%20inflation1710.png
(Reporting by Dhara Ranasinghe; Editing by Catherine Evans)