A declaration of confidence in rising inflation by the European Central Bank's chief economist has boosted anticipation ahead of its meeting in Latvia on June 14, but while the governing council is set to discuss winding down its bond-buying program, analysts do not foresee any announcement of an end date just yet.
The €30 billion-a-month bond purchases are set to cease in September, although economists expect an extension until the end of the year, probably at a lower monthly amount. ECB Chief Economist Peter Praet confirmed in a speech June 6 that discussions on concluding the €2.55 trillion program would begin in the Latvian capital Riga, and added that inflation was on course to return to target levels. Investors took these comments to imply that concerns over Italian politics would not stay the bank's hand as it sought to exit quantitative easing.
"It would be unusual for the ECB to firmly commit itself to a future course of action (stopping asset purchases at the end of 2018) six months ahead of time," Holger Schmieding, chief economist at Berenberg Bank, wrote in a research note.
"The ECB will likely say that it is now formally discussing the exit strategy and that recent inflation data have strengthened its confidence that inflation is trending up towards the target. However, we expect the ECB to still shy away from a firm decision in June," Schmieding said, adding that the ECB would likely confirm market expectations that asset purchases will be reduced in October and then stopped in December.
Frederik Ducrozet of Pictet Wealth Management agreed that the ECB will likely adopt a flexible approach before ending net asset purchases in December 2018.
"We think a 'flexible tapering' announcement is more likely than an unconditional commitment to an end date for QE. The ECB could say that there will be no further large expansion of asset purchases barring an unwarranted tightening of financial conditions,” Ducrozet said.
Carsten Brzeski, chief economist of ING Germany, said the ECB will likely reveal a tapering of bond buying in line with previous announcements. "We expect an extension of QE at a reduced pace of €10 billion per month at least until December 2018. This would follow the pattern of the first recalibration of QE from €80 billion to €60 billion, which was announced three months in advance."
A series of weak economic data points, including a fall in German industrial production in April, has reduced confidence in the eurozone's recovery, helping send the euro under $1.18 from levels approaching $1.25 in early February. But preliminary figures showed that inflation in the euro area jumped to 1.9% in May, up from 1.2% in April.
And even if the ECB were inclined to continue quantitative easing, it is running out of bonds to buy. Under its self-imposed limits, the bank can hold no more than a third of any country's bonds. It is nearing that limit with German debt, holding €485.6 billion out of an eligible stock of €1.63 trillion, according to Société Générale.
There is little doubt over the ECB's intention to exit QE, tweeted Nick Kounis, head of financial markets research at ABN Amro, adding that the bigger issue would be the timing of the first interest rate hike.
"There is still uncertainty about the inflation outlook but ECB has always been minded to wind down QE after September because of program constraints and because it views stock [market] effects of QE as being dominant."
