When will FED and ECB decide changes to QE?

FED may tapering in September 2021. Photo: FED Chairman Powell

It seems that central bank meetings are more likely to throw up important policy changes when new forecasts are produced. The Fed and ECB update their forecasts quarterly with the next set of updates due in September. Of course, these forecasts are somewhat different. The ECB’s staff forecasts comprise one set of numbers produced by the bank, but do not include interest rate forecasts. The Fed’s forecasts do include interest rate views but consist of the individual forecasts of all 18 members of the FOMC.

Despite the above differences, it seems that there is added significance to the policy meetings when the forecasts are updated, very often because policymakers use the forecasts as a spur to recommend changes. The September meeting for   the ECB occurs on September 9th while the Fed’s get-together is on September 22nd. The question the ECB needs to address is, what happens to its Pandemic Emergency Purchase Programme (PEPP) when it reaches its EUR 1.85 trillion target next March? Does it announce a new plan of the same size or   smaller, drop the plan altogether or, as many suggest, “transfer” a reduced amount of purchases from this emergency programme, to the older – and smaller - Asset Purchase Programme (APP)?.

In theory, the ECB could wait much longer before announcing its plans for   the PEPP than September, perhaps the December meeting, where another new set of forecasts will be released. But much depends on the release date for   the ECB’s monetary strategy update which is due in the second half of 2021.

“We think the ECB will not want to present this at the same time as updating its QE plans. Hence, if the strategy update is ready by September, an update on QE could be left until December or   later but. In our view, the strategic update is more likely towards the end of the year and that may put the focus on getting the QE strategy for   next year in place at the September meeting”, Mr. Steve Barrow, Head of Standard Bank G10 Strategy forecasted.

Now all this discussion about the dates of QE announcements might seem pretty academic. But Mr. Steve Barrow thinks that the ECB announcing its tapering plans before the Fed (assuming the Fed updates us in September or   later) could have a bearing on how EUR/USD responds. If the ECB is seen to be pretty close to the Fed in its tapering aspirations, the market will be less likely to push USD ahead. This being said, our view is still that the Fed will start to taper at the beginning of 2022 and that’s likely to be three months ahead of the ECB. But it is the signalling of intentions that is important in our view, not the actual start of the taper itself.

Back in 2013 when we had the infamous taper tantrum in the US, the treasury market collapsed when the Fed started to hint at tapering. By the time, the actual taper started, which was not until the start of 2014, yields had started to come down again. In other words, we had a sort of sell the rumour, buy the fact reaction and it could be the same this time round as well. But as for   USD, if there seems to be a synchronicity to the Fed and ECB taper announcements, then it less likely that USD will rise when the Fed unveils its future bond-buying plans. Another point is that some other central banks could announce tapering aspirations as well. The Bank of England’s GBP 895 billion QE target should be hit in December and Mr. Steve Barrow suspects that it too will scale any future buying right down and may even just decide to reinvest the proceeds of maturing bonds to keep the total static. This could be announced in November, although August is not out of the question. “Whenever it is it should reinforce the idea that the Fed is not out in front on this one and that, in our view, should hold USD back”, Mr Steve Barrow said.