How the ECB could deliver a shock to markets

ECB President Mario Draghi reacts as he delivers a speech during a meeting of the Committee on economic along with monetary affairs (ECON) at the European Parliament, in Brussels, on May 29, 2017.

Emmanuel Dunand | AFP | Getty Images

ECB President Mario Draghi reacts as he delivers a speech during a meeting of the Committee on economic along with monetary affairs (ECON) at the European Parliament, in Brussels, on May 29, 2017.

Traders are eagerly anticipating Thursday’s meeting of the European Central Bank (ECB), with some contemplating whether President Mario Draghi’s actions could radically reschedule when the central bank’s first rate hike could come.

Back in July, Draghi said which discussions regarding a change in monetary policy stance will begin from the fall. In September, he then indicated which the bulk of the decisions regarding the asset purchase program are likely to be made in October. With autumn leaves right now lining the streets, markets are expecting the “fall” decision to come which Thursday.

Herein lies the challenge. What can the ECB do which will simultaneously:

  • Keep the doves happy (including Draghi himself who has said which considerable stimulus may still be needed to get inflation back up to 2 percent)
  • Placate the hawks who are getting nervous about too much accommodation backfiring
  • Keep peripheral yields pinned (especially given the Catalan backdrop along with Italian elections next year)
  • Ensure which the market doesn’t materially bring forward the timing of the first rate hike which could then cause an unwarranted appreciation from the currency
  • Avoid running into any (self-imposed) technical constraints due to the limited supply of bonds left from the universe for the ECB to buy, particularly pronounced in Germany.

which’s no easy task. Which is actually why the compromise may be which the asset purchase program — which is actually set to expire in December — is actually extended into the latter half of next year yet that has a much smaller monthly net purchase amount. (Gross purchases will stay positive as the ECB re-invests the proceeds which gets through buying debt, which will average about 15 billion euros per month in 2018).

The central bank has remained ultra-accommodative from the years since the global financial crash along with the euro zone sovereign debt crises, along with also introduced U.S.-style quantitative easing (QE) — buying assets to stimulate lending — which is actually used to stoke inflation along with boost the economy.

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