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2 Mar 2015
ECB: One question to rule them all - RBS
FXStreet (Guatemala) - Analysts at RBS explained that in the ECB's January Introductory Statement made clear that asset purchases can continue beyond September 2016:
They are intended to be carried out until end-September 2016 and will in any case be conducted until we see a sustained adjustment in the path of inflation which is consistent with our aim of achieving inflation rates below, but close to, 2% over the medium term.
Key Quotes:
"The problem is that we don’t know how to translate those ‘mission accomplished’ criteria into precise thresholds and triggers which will determine when purchases are tapered or terminated. To be precise, we don’t know what qualifies as ‘sustained’ or what period ‘medium term’ refers to."
"We believe that the first best communication strategy would be 'explain and quantify' what the Council intends by its open-ended statement, as part of a broader probabilistic discussion of monetary strategy, outlining the current plan and how it could change in light of circumstances."
"However, we think it is highly unlikely that the Council will be willing to provide a precise working definition of what constitutes ‘sustained’ and ‘medium term’, let alone publish that state-contingent plan. If the Council is unwilling to provide that information then the central bank watcher has to infer it from the information that the ECB does put in the public domain. We may not be told what the Council’s definition of a sustained adjustment ininflation is, but we can proceed by process of elimination.
"The month’s press conference provides an excellent opportunity to begin that process because the ECB will publish the latest set of staff projections – most likely out to 2017 – alongside the Introductory Statement. It is reasonable to ask whether that phrase (‘sustained adjustment’) applies to the staff projections, and given the central (but not critical) role of the projections in the policy process, that is useful information when it comes to forecasting whether there will be an acceleration before and/or elongation beyond September 2016."
"In short, we hope and expect that the President will be asked a question along the following lines:
Does the latest inflation projection show a sustained a sustained adjustment in the path of inflation which is consistent with your aim of achieving inflation rates below, but close to, 2% over the medium term? If it does, what does that imply about whether asset purchases are likely to continue beyond September 2016? And if it doesn’t, did you consider stepping up the pace of purchases today?"
They are intended to be carried out until end-September 2016 and will in any case be conducted until we see a sustained adjustment in the path of inflation which is consistent with our aim of achieving inflation rates below, but close to, 2% over the medium term.
Key Quotes:
"The problem is that we don’t know how to translate those ‘mission accomplished’ criteria into precise thresholds and triggers which will determine when purchases are tapered or terminated. To be precise, we don’t know what qualifies as ‘sustained’ or what period ‘medium term’ refers to."
"We believe that the first best communication strategy would be 'explain and quantify' what the Council intends by its open-ended statement, as part of a broader probabilistic discussion of monetary strategy, outlining the current plan and how it could change in light of circumstances."
"However, we think it is highly unlikely that the Council will be willing to provide a precise working definition of what constitutes ‘sustained’ and ‘medium term’, let alone publish that state-contingent plan. If the Council is unwilling to provide that information then the central bank watcher has to infer it from the information that the ECB does put in the public domain. We may not be told what the Council’s definition of a sustained adjustment ininflation is, but we can proceed by process of elimination.
"The month’s press conference provides an excellent opportunity to begin that process because the ECB will publish the latest set of staff projections – most likely out to 2017 – alongside the Introductory Statement. It is reasonable to ask whether that phrase (‘sustained adjustment’) applies to the staff projections, and given the central (but not critical) role of the projections in the policy process, that is useful information when it comes to forecasting whether there will be an acceleration before and/or elongation beyond September 2016."
"In short, we hope and expect that the President will be asked a question along the following lines:
Does the latest inflation projection show a sustained a sustained adjustment in the path of inflation which is consistent with your aim of achieving inflation rates below, but close to, 2% over the medium term? If it does, what does that imply about whether asset purchases are likely to continue beyond September 2016? And if it doesn’t, did you consider stepping up the pace of purchases today?"