FRANKFURT (Reuters) - The European Central Bank will next week debate whether to end a massive bond purchase scheme later this year, taking its biggest step yet in dismantling crisis-era stimulus credited with reviving growth after a double-dip recession.
Whether a decision is made on Thursday or only in July is secondary: The end of the purchases is a foregone conclusion, and the key question is how the ECB will guide markets on the expected path for interest rates.
Policymakers, speaking on and off the record, have all guided to expect the end of bond buys this year. But they also caution against a sudden stop, so expect a three-month taper from October until the close of the year.
The ECB tends to take big decisions in two steps, so Thursday is likely to be the start of a broader policy redesign, ending at its July 26 meeting. But given unexpectedly hawkish comments from chief economist Peter Praet this week, the bias is towards some key decisions already being taken in June.
The first step could be ECB President Mario Draghi announcing the bank is comfortable with the path of inflation and is drawing up plans for a policy shift.
Draghi could also take a bolder step, announcing explicitly an intention to end the purchases but waiting until July with all the details, like the wording of the ECB’s new guidance or how it would taper the programme.
But he may just say that a discussion on a policy shift has started, which would be a clear disappointment after Praet, a dove and a close Draghi ally, stoked expectations just hours before the ECB’s quite period started.
The ECB’s guidance stipulates that interest rates will stay unchanged until “well past” the end of bond purchases, so any decision to finish them will create the need for a more precise definition.
The new guidance is likely to contain a time element and also make rate hikes conditional on inflation. It could say that rates will stay at their current level for some months or quarters but for as long as they remain consistent with bringing inflation back to the bank’s target of almost 2 percent.
The ultimate aim, policymakers argue, is to ensure any rate hike expectation is not brought forward with the decision to end bond purchases and to retain the flexibility to push out the first move even further, if needed.
The headline inflation projection for this year is likely to be raised but the forecast for growth is expected to be cut while core inflation is seen unchanged, sources said. While the inflation rise will be due to higher energy costs and the ECB tends to look past oil price shocks, policymakers are likely to see the new figure as supporting the case for policy normalisation. Still, the change in the projections is not likely to be fundamental.
Reporting by Balazs Koranyi; editing by John Stonestreet