FRANKFURT, Germany — With the economy growing nicely, the European Central Bank is expected to sketch out a road map at its meeting Thursday for a gradual exit from its extraordinary monetary stimulus program.
The ECB’s president, Mario Draghi, has said that “the bulk” of the decisions about phasing out its 60 billion euros ($71 billion) in monthly bond purchases will be made at the gathering of the bank’s 25-member governing council.
The decisions could be outlined in the short statement the bank releases after the meeting, followed by a fuller explanation and details during Draghi’s subsequent news conference.
Here are five key elements to watch out for.
LOWER FOR LONGER?
One of the most anticipated numbers from the meeting will be the reduction in monthly purchases, and for how many months. The bond purchases began in March 2015 and are slated to run at least until the end of this year, and longer than that if needed to push inflation up from the current annual 1.5 percent toward the bank’s goal of just under 2 percent. Draghi has said that they won’t come to an abrupt end, as that could rattle markets.
Investors are watching closely to see if the stimulus is being withdrawn more quickly or more slowly than expected. A faster withdrawal would likely send the euro higher against the dollar, something the ECB is trying to avoid as it can hurt eurozone exporters. The ECB has to balance that concern against the need to pacify stimulus skeptics on the board who want the stimulus program brought to a definite end. It also needs to keep in mind that it will eventually run out of eligible bonds to buy.
One common scenario floated by some analysts is a reduction to 30 billion euros a month for nine months. If the ECB wants to emphasize the withdrawal will be gradual, it could adopt a “low for longer” approach, some analysts think. That could mean 20 billion euros a month for all of 2018.
The bond purchases are a way of pushing newly created money into the financial system, a step aimed at lowering long-term interest rates, easing bank credit to companies, and raising inflation.
THE UPS AND DOWNS
If the stimulus withdrawal turns out to be at a faster pace than markets expect, the euro could bounce higher against the dollar. The short-term movement on the day is less important than the longer-term trend.
The ECB previously surprised markets at its December 2016 meeting with a “lower for longer” move. It cut the stimulus from 80 billion euros per month to 60 billion euros as of April 2016 — but extended the earliest end point from March 2017 to December. Markets fluctuated initially and it took investors a while to decide that the ECB’s move on the whole was more supportive than not for the economy. The euro did not appreciate significantly for several months afterward.
That experience has led some analysts to think the bank may go for the “lower but longer” approach again.
A DATE CERTAIN
The ECB may decide not to put a definite end date on the bond purchases. An end date might relieve the stimulus skeptics on the board. But it would tie the central bank’s hands. The bank may stress that further reductions in bond purchases will depend on official data showing the economy continues to grow and supporting the hope that ongoing growth will eventually push inflation toward the bank’s goal. Not setting an end date would leave some flexibility to increase the bond purchases again if something bad happened in the economy.
SEE YOU IN 2019
The ECB is likely to also emphasize a slow approach to withdrawing other stimulus measures once the bond purchases are done. Among those measures is its zero interest rate for refinancing operations, a key benchmark that steers short-term interest rates across the economy. Another is its deposit rate of minus 0.4 percent — essentially a levy on deposits from commercial banks that aims to push them to lend excess cash rather than pile it up at the central bank.
The ECB says those rates will rise only “well past” the end of the bond purchase program. If the bond purchases end sometime in the second half of 2018, that means it will be well into 2019 — or almost two years from now — before Draghi and his colleagues decide to raise interest rate benchmarks.
A BIG PILE OF BONDS
The ECB will also likely emphasize its commitment to use the money it gets from maturing bonds to replace them. That means that while no new stimulus would be added, the old stimulus — represented by the pile of bonds held by the ECB, expected to total 2.6 trillion euros by the time the program ends — would remain.
By contrast, the U.S. Federal Reserve has already tapered off its own bond purchases, started raising rates and this month is beginning to let its $4.5 trillion pile of bond gradually shrink as bonds mature.