July 23, 2018 / 6:47 AM / 10 months ago

Left unanswered - Five questions for the ECB

LONDON (Reuters) - When the European Central Bank meets this week, investors will be looking for more details on the bank’s plans to dismantle crisis-era stimulus.

FILE PHOTO: European Union flags flutter outside the European Central Bank headquarters in Frankfurt, Germany, April 26, 2018. REUTERS/Kai Pfaffenbach/File Photo

In June, the ECB went further than anticipated in outlining its intentions: Monthly bond purchases will be tapered after September, the 2.6 trillion euro ($3.0 trillion) scheme is set to end by year-end and rates will remain low for some time.

Questions were left unanswered, though. Here are some that investors hope will be addressed at Thursday’s meeting.

1/ Will the ECB update its policy guidance?

For sure, this is an opportunity for the ECB to provide some clarity, but while guidance on quantitative easing (QE) may be firmed up, that on interest rates is not expected to be.

Still, ECB chief Mario Draghi is likely to be pressed on what the bank meant when it said it sees rates staying steady “at least through the summer of 2019.”

That sparked a debate about the timing of the ECB’s first rate hike since 2011. Reuters reported this month that some ratesetters believed an increase was possible as early as July 2019 while others ruled out a move until autumn.

Money markets are fully pricing a 10 basis point hike in the minus 0.40 percent deposit rate by October 2019 ECBWATCH.

(For graphic on The European Central Bank's QE programme, click reut.rs/2LcDKn5)

2/ How will the ECB reinvest funds from maturing bonds?

With asset purchases drawing to a close, reinvestments from bonds the ECB has bought under QE are becoming a key driver for markets.

Between now and May 2019, the average monthly redemption is estimated at about 15 billion euros ($17 billion) - around the same amount as net asset purchases in the last quarter of 2018.

The ECB has said it will reinvest funds from maturing bonds in the market but there are questions over how it will do this.

According to one theory, the bank could buy more long-dated bonds to keep borrowing costs down after QE ends and limit the natural ageing of its massive bond portfolio.

Another issue is whether reinvestments will be spread out across the bloc - allowing some flexibility given supply constraints in Germany and the Netherlands.

(For graphic on longer-dated "semi-core" debt euro zone outperforms peers, click reut.rs/2LDhRtr)

3/ What does an escalating trade spat mean for the ECB?


As trade tensions between the United States and its partners escalate, the ECB could find itself caught in the middle.

    Having just announced its stimulus scheme is set to end, the central bank could be faced with a conflict that weighs on an export-dependent economy and drags down growth and inflation projections.

    The European Commission this month trimmed its 2018 growth forecasts for the euro zone to 2.1 percent from 2.3 percent, citing the threat of increased trade tensions.

“A slowdown in exports and therefore economic growth would drag back growth to nearer the 1 percent level... but more importantly it will weigh on inflation,” Barnaby Martin, head of European credit strategy at Bank of America Merrill Lynch, said.

“For the ECB that will be tricky as after having wound down QE they may realize that inflation is absent.”

(For graphic on EU cuts euro zone growth forecast, blames trade wars, click reut.rs/2JFmWPK)

4/ But can the ECB can take comfort from a stabilisation of growth indicators?

Recent indicators suggest the euro zone economy is stabilising after losing momentum earlier this year.

Business growth accelerated in June, while annual inflation in the currency bloc is at 2 percent — the level around which the ECB targets price rises.

That backdrop is reassuring for the ECB’s plans.

More than 70 percent of economists polled by Reuters - 51 of 69 - said they were confident the ECB would hike rates before the next economic downturn. Eighteen said they were not.

(For graphic on eurozone economy stabilizes, click reut.rs/2LdBlbF)

5/ How does the ECB see Greece as it nears its bailout exit?

Draghi may be pressed on recent comments to the European Parliament on Greece, which is set exit its third international bailout in August.

Draghi said Greece could become part of QE if it had a waiver, but that such a waiver was not warranted under Greece’s post-bailout surveillance. He added that the ECB would make its own debt-sustainability analysis on Greece (DSA).

Analysts say the fact that Draghi bought up a DSA, only relevant if the ECB were still contemplating buying Greek bonds, suggests the ECB may consider doing that once its conditions are met.

Though a DSA is unlikely until Greece has implemented reforms agreed in June with its EU creditors to ease its debt profile, the subject may well come up on Thursday.

(For graphic on Greece's debt to come under ECB lens, click reut.rs/2Ld0wv1)

Reporting by Dhara Ranasinghe and Saikat Chatterjee; Graphics by Ritvik Carvalho; editing by John Stonestreet

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