Economists are expecting a further wait for clarity on the European Central Bank’s (ECB) quantitative easing programme, as its top policymakers meet in Frankfurt and publish updated forecasts on the Eurozone's inflation outlook.
Deutsche Bank chief executive John Cryan today said the ECB should end the "era of cheap money", saying it is causing "ever greater upheavals".
We are seeing "signs of bubbles in more and more parts of the capital market where we wouldn't have expected them", he said in a speech in Frankfurt ahead of the ECB's latest policy decision.
Yet there is little hope of an immediate change in stance from the central bank. For weeks investors have been waiting on tenterhooks for signs the ECB will reduce the pace of its monthly asset purchases, currently running at €60bn (£55bn) per month.
The programme is due to run out in December, with an extension at a reduced scale expected by markets. However, the precise details of the so-called taper of bond purchases will be crucial for fixed income markets in particular.
The ECB’s governing council will announce its monetary policy decision at 12:45pm UK time, followed by a press conference led by ECB president Mario Draghi at 1:30pm.
At previous meetings Draghi has firmly denied that the governing council has discussed options for tapering. Tomorrow could change that, with the ECB’s economists being tasked with examining options for the future path. That would set up a decision at the October meeting, well after this month's German parliamentary elections.
In the absence of any policy decisions, updated staff forecasts released tomorrow will be heavily scrutinised for changes in the inflation outlook.
A survey of economists by Bloomberg today showed a consensus view that inflation forecasts for next year will be reduced, reflecting the recent surge in the value of the euro. Meanwhile GDP growth forecasts this year and next are expected to rise.
Marie Owens Thomsen, chief economist at Indosuez Wealth Management, said: “The ECB's update of their forecasts will be very important for gauging the likely evolution in policy. The forecasts might reveal to what extent the ECB thinks that the stronger external value of the euro will impact GDP and inflation.”
The euro’s surge has been driven in recent weeks in part by Draghi’s silence on the issue of the single currency’s strength. A stronger euro is likely to weigh on inflation as imports become cheaper, preventing the ECB from hitting its two per cent annual inflation target.
Any move to taper is likely to be slow, according to BMI Research, with the ECB keen to avoid a “disorderly reaction and a much stronger euro” as it awaits the Federal Reserve’s own decision on unwinding quantitative easing in September.
In a note, the analysts said: “Our base case is that asset purchases will continue throughout the entirety of 2018 at least, even as the monthly amount is gradually tapered.” Rate rises could then begin in late 2018 or early 2019.