ECB Preview: The time is right to set the end-date for asset purchasing

 

• A number of the ECB Governing Council members confirmed that the ECB will decide about the future of the asset purchasing.
• The end of the asset purchasing is expected to be prolonged until December this year with Draghi emphasizing the interest rate stability well past the horizon of asset purchases.
• With Euro’s exchange rate lower and oil prices surging, the ECB macroeconomic projections are set to forecast higher inflation near-term.
• The EUR/USD surged on hawkish news from ECB with June rate rake being priced-in, so dovish ECB press conference should send EUR/USD lower. 

The ECB’s asset purchasing is coming to an end as the evidence if the inflation drivers reappeared on the horizon and the ECB chief economist Peter Praet was the person to let this out to the public.

The Italian fear factors dissipated recently with the new Italian populist government formed and scaling back the fears of new elections becoming de facto the Eurozone yes or no vote. In terms of ECB’s main policy goal, the inflation, the conditions are favorable for the Governing Council to declare the war with disinflation won as both weaker euro and the surge in oil prices in recent months should add convincing signals. Except for the asset purchasing program future, the ECB macroeconomic projections are therefore expected to see the upper revision in inflation forecast.

There are actually only three chances for the ECB to communicate the future of its asset purchasing programme (APP) between now and the official end of the programme in September. It is either the June ECB meeting in Riga scheduled for next Thursday, July  26 meeting in Frankfurt or the last chance is the September 13 meeting to assess if and when to unwind the asset purchasing or to keep it going until the end of this year. 

It is obvious that the last chance in September is not a real option in the Eurozone, so the June meeting in Riga is set to be the obvious term for deciding upon APP, especially with the governing council members hinting on it just before the “quiet period” began one week before the meeting.

The ECB chief economist Peter Praet said it clearly in Berlin on Wednesday that ”ECB will have to assess next week if to unwind APP,” adding that the recent market rumors on ECB discussing its asset purchasing program ending at the end of 2018 are  “input for discussion.” Praet also confirmed that he expects interest rates to remain at present levels for an extended period of time.

This has also been the case of the influential ECB Governing Council member and the Bundesbank President Jens Weidmann who said market expectations of the end of the asset purchasing programme to end by the end of this year are plausible as inflation is expected to gradually return to 2% ECB target.

Dutch Governing Council member Klaas Knot who added his own views on the timing of the asset purchasing announcement saying it is “reasonable to announce the end of APP soon”

The Euro surged on the news of the ECB officials confirming that the time to decide on asset purchasing is ripe and since the central market expectations are that the APP will end in December this year with the rate hike coming in June of 2019, any sign of dovishness should be Euro negative.