Eurozone: ECB after Jackson Hole - ING

High expectations often mean high risk of disappointment as Draghi’s speech in Jackson Hole was an anti-climax after weeks of financial markets’ speculation about possible hints at tapering, explains the analysis team at ING.

Key Quotes

“After all the excitement about possible Draghi fireworks in Jackson Hole, the delivered speech was an anti-climax, a non-starter. To some extent, Draghi’s speech could also be seen as a clear sign that Draghi and the ECB don’t want to be pushed or rushed by financial markets. Draghi came to Jackson Hole to deliver a non-monetary-policy speech and that is what he did.”

“Trying to find at least some hints in a speech which didn’t have any hints, one might be tempted to wonder why Draghi refrained from any comments on the ECB’s current (or future) monetary policy. In our view, there were a couple of reasons for Draghi’s silence: first of all, less than two weeks ahead of the next ECB meeting, Draghi clearly did not want to pre-empt or influence the discussion within the Governing Council. Also, the ECB knows that talking down the euro would only work if the ECB could follow up with actual dovish action – unlikely with an ECB gradually moving towards tapering. It also looks as if the Governing Council has still not made up its mind entirely about the next steps. In our view, there seem to be diverging views on whether or not tapering is really necessary (for example illustrated by the debate on the stock and flow effects from QE). In sum, it still looks as if the ECB is paving the road towards the beginning of the QE exit but it still does not know how and when to put it into practice.”

“Nevertheless, given ongoing uncertainty in financial markets, we think that the ECB will have to prepare and present a game plan for tapering. Simply to give some guidance. This is why we think that in the run-up to the next ECB meeting on 7 September, when the ECB is likely to task the committees to look into tapering, the members of the Governing Council will have two important home assignments to solve before meeting in Frankfurt: besides the scarcity of assets, what are the economic arguments behind tapering and how should it be implemented?”

“In our view, the main arguments in favour of tapering are the successful defeat of the deflation risk, the strong economic recovery and bond scarcity. Tapering should be a cautious and very gradual withdrawal of some monetary stimulus, preferably without causing any tightening of financial conditions. The best option to do this could be a tapering announcement to reduce the monthly purchases from €60bn currently to €30bn starting January 2018 for at least six months combined with an extension of the list of eligible assets for QE purchases. This could exactly be what the minutes of the last ECB meeting described as “the Governing Council needed to gain more policy space and flexibility to adjust policy and the degree of monetary policy accommodation, if and when needed, in either direction”.”

“We expect the ECB to at least present a game plan at the September meeting, probably enriched by a clear message that the relevant committees have been tasked to investigate options for tapering. A dovish tapering which avoids the so-called unwarranted tightening of financial conditions is what the ECB in our view is aiming at.”