The European Central Bank is now facing the same questions the US Federal Reserve Board did in 2013. Should it gradually start to withdraw monetary stimulus from the euro zone economy and – crucially – if so, how does it go about this? The Fed set off a market panic three years ago – the so-called taper tantrum – when it started to do this. The ECB will want to avoid the same fate. Here are the three key things to look out for:
1. What happens with the quantitative easing programme? This is the big one for today's meeting. Under quantitative easing the ECB has been buying bonds – mainly Government issued ones – on the market since March 2015, as a way of injecting cash into the euro zone economy and keeping down long-term interest rates. It now purchases €80 billion a month – and this has been a key factor in holding down bond interest rates in countries such as Ireland, making it cheaper for the Government to borrow.
The current bond-buying programme runs until next March, though the ECB has said it will extend it if needed. Close attention will be paid to what it says about this today.
ECB president Mario Draghi is expected to signal that purchases will continue beyond March – possibly for another six months – quite possibly at the same rate. There is some speculation that the ECB could cut the level of monthly purchases after next March, possibly to around €60 billion a month. The Financial Times has quoted sources suggesting a trade off might be to cut the monthly total, but confirm that the buying will continue. However, Draghi will be concerned not to spark selling pressure on government bonds.
It remains unclear what level of detail Draghi will give today. He will want to leave the ECB as much room for manoeuvre as possible, but needs to provide some guidance to the markets. His council is also split, with a German-led wing unhappy with the whole bond buying exercise in the first place. Davy stockbrokers speculate in a note published this morning that with these tensions bubbling, Draghi may not get unanimous support to extent the quantitative easing programme. He will still push ahead, they believe, but could also suggest that the programme will be run down at an unspecified time in the future when conditions allow.
Also watch to see does the ECB change the rules on which bonds qualify to be bought under the quantitative easing programme. It is starting to run up against its own self-imposed rules in some cases – for example its purchases of Irish and Portuguese bonds will be limited in the months ahead, unless it tweaks its rules.
2. What does Draghi say about Italy? As little as possible is the likely answer, but every word and every arch of the presidential eyebrow will be analysed on this one. The Italian authorities have been trying to put together a rescue programme for troubled bank Monte dei Peschi di Sienna, but the referendum results and the fall of the government has created big problems. Now Italy is looking for more time, so that it can try to avoid a state bailout of the bank. The ECB president, himself Italian, will be at the centre of all this, but will want to say as little as possible.
3. What will be the ECB's economic forecasts? The ECB has been predicting continued slow growth and a gradual pick up in inflation. This is the flipside of its moves on its monetary stimulus programme - it really has to maintain an easy stance until it is confident that its inflation rate is heading to its target level of close to 2 per cent. At the moment it expects inflation of 0.2 per cent this year and 1.2 per cent in 2017. On this basis, markets are not anticipating a rise in short-term interest rates for another few years. Draghi has said he does not expect inflation to reach its target level until early 2019, and even then only with the "extraordinary support of our monetary policy." One of the things to watch today will be whether there are changes in the economic forecasts and what the ECB's first estimates will be for 2019.
