Minutes of the ECB’s September meeting show that ECB is preparing a dovish tapering at the next meeting
There were four issues to look out for in the ECB’s minutes of the September meeting: how did the ECB assess the recent strengthening of the euro; did the ECB talk about the scarcity problem; how satisfied is the ECB with the current inflation developments and forecasts and was there any preliminary discussion on possible tapering scenarios? The just-released minutes gave answers to three out of these four issues. Only the scarcity issue remains unaddressed.
The minutes also show that the ECB had a first discussion on different scenarios, tweaking both “the pace and the intended duration” of QE.
Recent political developments have put the ECB and the tapering discussion on the backburner. At least for the time being. However, with three more weeks to go until the next ECB policy meeting, the tapering discussion should gain momentum soon again. In our view, the ECB will first identify a targeted, final, size of the balance sheet before it derives paths towards this balance sheet target.
With the latest lawsuit at the German Constitutional Court, any extension of QE will preferably not have an open end. Against this background, there are in our view three potential scenarios for tapering: Fed-style tapering, the staircase option or lower for longer.
In our view, the ECB will opt for the ‘lower for longer’ option.
It would not only follow the pattern of the ECB’s first tapering decision in late 2016 but could also help anchoring interest rate expectations, in combination with emphasis on sequencing. Such a strategy could also help immunise the ECB’s monetary policy against further exchange rate fluctuations. All in all, even though the outcome of the ECB’s September meeting looked a bit disappointing, the discussion at the EuroTower already seems to have been lively. It looks as if the September meeting was the last stop before the ECB will announce first details of its dovish tapering at the meeting on 26 October.