September 25, 2017, 1:35 am
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ECB seen reducing QE in Oct; shut program by end-2018

BENGALURU- The European Central Bank is likely to announce a reduction of its monthly asset purchases in October, according to a majority of economists in a Reuters poll, who also said they expect the central bank to shut down the program by the end of next year.

Expectations the ECB will scale back its stimulus have been supported by solid growth in the euro zone this year, although inflation, at 1.5 percent, remains below the central bank’s target of just under 2 percent.

In July, the ECB said it had not discussed reducing its asset purchases, also known as quantitative easing (QE), but signaled the change would likely come “this autumn”.

Nearly three-fourths of 66 economists in a Reuters poll taken Aug 28-31 expect the central bank to announce a change in October. Just three weeks ago, slightly over half of economists polled had said such an announcement would come in September.

But in the latest poll, only 15 respondents expected it at the Sept 7 policy-setting meeting. The remaining five economists said the central bank will wait until December.

“The ECB at best will charge the relevant committee to examine how QE can proceed in September, and the concrete announcement of tapering and how QE will proceed will come only in October,” said Peter Vanden Houte, chief euro zone economist at ING Financial Markets.

Asked what the ECB is likely to do beyond December, when the asset purchases program is scheduled to expire, economists unanimously said the central bank would extend it but would reduce monthly purchases from the current 60 billion euros. Most said they would be reduced to 40 billion euros a month to start.

The euro zone is seeing its strongest run of growth in more than a decade. And while inflation has lagged - as it is in many economies - the latest euro zone data were higher than expected.

That may support the case for tapering, but the central bank is now dealing with a strengthening euro up over 12 percent this year against the dollar. A rising exchange rate tends to push down import prices, further weakening inflation.

The euro’s strength has an increasing number of policymakers at the central bank concerned, according to an exclusive Reuters story on Thursday based on three sources familiar with those discussions.

A stronger currency has also increased the chances of an even gentler reduction in the pace of asset purchases.

“Rather than signal exit in advance, we think the ECB strategy will be to wrap the exit decision in dovishness when it is announced in October,” wrote Mark Wall, chief euro area economist at Deutsche Bank, in a note.

“With the full normalization of core inflation not yet compelling, the onus is on the ECB to avoid markets, and in particular the exchange rate, overshooting.”  – Reuters
 
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