A reality check
On Wednesday morning, rumours the ECB president, Mario Draghi would possibly not say anything new on the bank's monetary policy at his speech at the Jackson Hole conference on 25 August shook up markets. The Reuters news agency reported sources saying that 'expectations that this will be a big monetary policy speech are wrong'.
Some market participants took this news report as a big disappointment. Many assumed that Draghi would not use the occasion to give further hints at reducing the ECB’s QE programme. In our view, such a reaction is a bit overdone. First of all, less than two weeks ahead of the next official ECB meeting, any announcement on significant policy changes are unlikely. Secondly, the important new set of ECB staff projections for inflation and growth will not have been finalised by 25 August. And finally, ruling out 'a big monetary policy speech' does not automatically exclude subtle changes in tone and message.
Timing is everything
Looking ahead, the path towards tapering is very obvious: the ECB only has three official meetings left at which it communicates and moderates the beginning of the end of QE. A major part of this challenge will be to find the right arguments.
Sure, the risk of deflation has disappeared but headline inflation is still far off levels where the ECB would like it to be.
Also, the stronger euro alone could easily shave off 0.3 percentage points from the next ECB inflation projections for 2018 and 2019, presented at the September meeting. Even though parts of this exchange rate effect should be offset by stronger-than-expected growth, a slight downward revision of the ECB’s inflation forecasts looks likely. As inflationary pressure is hard to find, the ECB will have to put more emphasis on stronger growth, which consequently requires less monetary stimulus to maintain the same level of monetary accommodation, to justify tapering. In this regard, the one and only real new element of the Sintra speech could be re-introduced.
Draghi's hand doesn't need to be forced
Over the last three years, the ECB has had basically two major ways in preparing markets for upcoming policy changes: ‘task the relevant committees’ and ‘review and re-examine the current monetary policy stance’.
The first one was applied at the start of QE and at the end of last year when the key phrase 'the Governing Council has tasked ECB staff and the relevant Eurosystem committees' to do something indicated upcoming action. This action, by the way, never came in the subsequent meeting but three months later. The phrase that the Governing Council would 'review and re-examine the current monetary policy stance at the next meeting' was used in late 2015 and early 2016 when the ECB beefed up QE twice. This option was always followed by immediate action at the subsequent meeting.
All of this means that the Draghi doesn’t have to use the Jackson Hole platform to pre-announce any upcoming policy changes. He can either opt for the well-known “committees” option at the September meeting to prepare for a December tapering or try to cap further euro appreciation by keeping his cards to his chest in September and prepare the 're-examine' option in October. While the latter could be the more dovish option, we think that Draghi and the ECB will want to go down the well-known road at the September meeting, announcing that the Governing Council has tasked the relevant committees to investigate options for a reduction of QE in 2018.