European Central Bank to shut door on easy money at end of 2018

European Central Bank should shut the door on its monthly asset purchases next September, according to a majority of economists in a Reuters poll, but they were split on whether it would.

Most believe it will stop by the end of next year with a small number saying mid-2019.

A shutdown would be in step with other major central banks turning up the heat on monetary policy despite inflation well below their targets and generally expected to stay that way in the year ahead.

The latest poll of over 65 economists taken Nov 24-29 also underscores confidence in the euro zone economy, with the current upswing predicted to continue next year, even as a significant pickup in inflation is not on the cards.

With economic growth in the currency bloc set to mark its best year in a decade, the ECB announced in October a cut to its monthly bond buying to 30 billion euros each month starting from January through to September.

Currently it purchases bonds worth 60 billion euros each month. While the central bank left the door open for an extension beyond September, ECB Governing Council members were split on that view, according to the minutes of October’s meeting released last week.

Some 34 of 52 economists who answered an additional question said the ECB “should” shut its quantitative easing program in September.

While 52 of 60 economists who answered another question expect the central bank to stop its printing press by the end of next year, they were split if it would happen in September.

Only a handful of respondents expected the ECB to extend bond purchases beyond next year.

“The Bank has stated that its purchases will not end abruptly, so to stop dead in September would cause financial markets instability,” said Jennifer McKeown, chief European economist at Capital Economics.

“A decision to end in September is possible, but it would need to be flagged well in advance.” Without changing its own rules, the ECB has little choice but to close the programme next year as it is nearing the limit of debt it can hold of some countries.

When asked if the differing views on the Governing Council would make it unlikely the central bank introduces any easing measures beyond what it has already announced, economists were almost evenly split.

“It is extremely unlikely that the ECB will introduce any easing measures beyond what it has already announced … because the economic outlook for the euro zone does not argue for further easing measures,” said Marius Gero Daheim, senior euro zone strategist at SEB.

“In case the outlook deteriorates, we would expect the hawkish camp to change its position and support additional measures.” While the latest expectations are in line with other major central banks trying to move away from ultra-easy monetary policy or in some cases take interest rates higher, the ECB is unanimously expected to keep rates on hold when it meets on December 14.

Robust momentum in the euro zone is expected to continue with predictions for economic growth, which has outpaced that of Britain and the United States in 2017, upgraded in the poll for this year, 2018 and 2019.

The consensus for 2.3 percent growth this year and 2.1 in 2018 was the highest in Reuters polls since polling began for the periods over a year ago.

The economy is forecast to grow 0.6 percent in the fourth quarter this year and then expand 0.5 percent each quarter through to the end of next year.

But expectations for price pressures in the currency bloc have not changed in the latest poll compared with earlier this month, with inflation not expected to reach the central bank’s target of just under 2 percent until at least the second half of 2019.

Inflation was forecast to average 1.5 percent this year, 1.4 percent next and 1.6 percent in 2019.

“If new shocks emerged and risks for inflation were directed downwards again, the ECB wouldn’t hesitate to ease further,” said Kristian Toedtmann, an economist at DekaBank in Frankfurt. Source: Reuters