World Economy

Draghi Opting for Faster QE Exit

Draghi Opting for Faster QE ExitDraghi Opting for Faster QE Exit

Mario Draghi may be willing to take a faster route to monetary policy normalization than economists previously thought. While no changes to interest rates or asset purchases are expected at Thursday’s meeting, most respondents in a Bloomberg survey now say the European Central Bank president will revise forward guidance as early as June, six months sooner than in an earlier poll.

Economists also reduced their estimate for how long it will take to taper quantitative easing and brought forward their predicted rate hike.

Public divergences among senior policymakers in recent weeks have fueled speculation that the ECB is close to signaling the withdrawal of its extraordinary stimulus. While Draghi has tried to quash that talk, and French presidential elections starting on Sunday still pose a threat to the eurozone, the region’s steadily-strengthening recovery may convince him to at least hint at his exit strategy.

“Assuming there are no major shocks, then the ECB will want to start taking the monetary stimulus punchbowl away, albeit at a modest pace,” said Alan McQuaid, an economist at Merrion Capital in Dublin. “It is likely to start with changing its forward guidance after the French election, then announce its tapering intentions after the German election in September and then deliver on bond-buying reductions.”

Thursday’s meeting in Frankfurt might see the official start of an exit discussion that has so far been conveyed only in public appearances and media interviews. Draghi said after the March 9 Governing Council meeting that it wasn’t a topic, and stressed in an April 6 speech that the economy offered no grounds to “materially alter our assessment of the inflation outlook.”

 Le Pen Concerns

Much depends on the signals coming from France, where the National Front’s Marine Le Pen is campaigning on an anti-euro and anti-European Union platform. She is one of the front-runners in Sunday’s vote to make it to a second-round runoff on May 7.

 “Since the ECB’s meeting will take place between the two rounds of the French presidential election and we expect Le Pen to make it into the second round, a materialization of the severe downside risk of her victory cannot be excluded by the time the ECB makes its decision,” said Christopher Matthies, an economist at Sparkasse Suedholstein. “A large change of wording or any action seems therefore unlikely since it might have to be reversed.”

The central bank currently says it expects to keep rates “at present or lower levels for an extended period” and “well past” the end of quantitative easing. Of the 47 economists polled last week, just eight expect policymakers to tweak forward guidance at this meeting. Even if they’re right, the change would be relatively minor, with all but one saying the ECB would drop its signal that rates might be cut further.

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