The ECB’s Chief Economist Peter Praet signalled that the central bank’s exit from its super-accommodative monetary policy would be a slow process given the possibility of a slower rise in inflation. The commentary, in an interview with Reuters, confirms the message from President Draghi’s speech earlier in the week, but is generally more explicit. He makes a number of points:
Inflation upswing might be slower – Peter Praet signalled that there is increasing evidence of more slack, which could lead to a ‘shallower’ recovery in inflation. Although it needs to be confirmed, he said that the Governing Council already had ‘strong evidence of a strong labour supply reaction’ and ‘it is clear that if you believe that the degree of slack is higher, then the process of convergence (of inflation) to below, but close to, 2% over the medium term would be drawn out.’
Net asset purchases likely to be wound down after September 2018 – ‘There is a convergence between market expectations and our intended end date, with the optionality… markets don’t expect us to continue the APP much longer’.
There will be a tapering period – ‘we will gradually bring net asset purchases to an end’ and ‘markets expect us to avoid cliff effects’.
Communication of QE exit might be later – ‘It can’t be on the very last day, but I argue that it shouldn’t be too early, either. There are not too many Governing Council meetings between now and then’. These comments seem to suggest that July (as well as June) is an option for the communication about the wind down of net asset purchases.
Rate guidance to be more explicit – ‘once you stop net asset purchases the signaling aspect of the asset purchase program disappears and you therefore have to be much more precise about the future path of the short term rates’. Mr Praet suggested that the main aim of that will be to keep rate hike expectations in check, saying that ‘as in the past, we will ensure that monetary policy controls the short end of the yield curve’.
Although Peter Praet is perhaps the most dovish member of the Governing Council, as Chief Economist he plays a key role in presenting both the economic analysis and the policy prescription to his colleagues. We remain comfortable with our base case following these comments. We continue to think that the ECB will set out a clear roadmap for the end of its asset purchase programme in June. We expect a tapering period of 6 months (3 months EUR 20bn p/m and 3 months EUR 10bn p/m). We do not expect the first rate hike to follow until the second half of next year (10bp in September and another 10bp in December). We expect the ECB to maintain or even strengthen its forward guidance on interest rates in June. The chances that the communication changes will come instead in July have increased.