Today’s European Central Bank’s meeting is expected to be imperative for the eurozone’s monetary policy. Markets are predicting that the central bank will give clarity on the steps it will take to unwind its easy money scheme.
The ECB are currently purchasing bonds worth €60 billion per month and are expected to cut this by €30 billion with the promise to continue to buy bonds for the next nine months.
Draghi is aiming to reduce stimulus while creating as little noise as possible in markets. To help aid this transition, the central bank will embody a slower exit strategy than previously thought, while extending the scope of its quantitative easing programme.
Although, the record low volatility levels will come to a close as the ECB withdraws from markets.
The central bank is mulling over the reinvestment of the proceeds from bond holdings as they come to maturity. This additional stimulus would provide an extra buffer amid concerns surrounding the end of quantitative easing.
The ECB is running low on bonds to buy, constrained by its own limitations.
Central banks in the eurozone’s smaller nations are already running short, with Germany being at the forefront of concerns. Most of the bonds come from Germany, but with its government’s budget surplus the countries debt pool is dwindling.
Policymakers are anxious about the euro’s rally this year – up 12% against the dollar – if the purchasing of bonds decelerates too quickly, the euro and German bonds could surge, hurting inflation and exports.
As for interest rate hikes, there could be delay as policymakers reduce asset purchases as a kind of substitute for raising the cost of borrowing. A rate increase will be more likely as we veer into the first half of 2019.
The eurozone is headed for its fastest expansion in a decade, making it more able to withstand less stimulus from the central bank.
Still, inflation is late to the party, at just 1.5% in September, below the ECB’s target of just under 2%. If the euro continues to edge upwards, inflation will struggle to reach the central bank’s objective of just under 2% by late 2019.
Wage stimulation seems to be the missing ingredient for inflation, which is not exclusively a eurozone problem, we can look just across the Atlantic, in the US, to find a similar narrative.
The participation rate could be the answer to this conundrum. In that, those in part-time employment, who want to work full time, or those who have been pushed out of the labour market and want to return are being excluded.