The board of the European Central Bank (ECB) has another meeting scheduled for next week. It may just be that the image arises that the bank will raise the official interest rate later than expected.
It may also be the case that the impression is emerging that buying government bonds will take longer. The bank currently intends to stop this on December 31, 2018. It is unlikely that the bank will continue with it any longer, but I think it is also irresponsible to rule it out completely.
The above could happen if ECB economists' estimates are revised downwards. The ECB publishes 4 times a year (in March, June, September and December) the estimates for inflation and economic growth for the current and 2 following years. Experience shows that these estimates are a kind of compass for the board.
Oil cheaper again
There are 2 variables that play an important role: the oil price and the euro. When they put their computers to work spitting out new estimates of inflation and growth, economists plug in an oil price and the euro-dollar rate. This concerns the average exchange rate in the 2 weeks prior to the cut-off date. Typically, that date falls 1 week before the end of the previous month.
The ECB assumes that this average rate is the rate that will apply in the coming years. In the case of oil, economists use the price of the futures contracts (2 weeks before the cut-off date). The oil price has fallen considerably in recent weeks. For the new estimates that the ECB will publish on December 13, the calculators probably assumed an oil price of $60 for 2019. In September, the oil price was still $71,90.
In short: the oil price used by the ECB to calculate inflation expectations was probably about 15% lower than in September. That in itself should drive down inflation estimates for next year.
Past experiences
If the inflation estimates from June of this year are included, we see that the oil price was approximately 20% higher than 1 quarter earlier. The euro was worth 5% less. The estimate for economic growth remained unchanged, but for inflation it was 1,7%. A quarter earlier that was 1,4%. Logical, because both a higher oil price and a weaker euro push up inflation in the euro zone. The inflation estimate would be higher if the exchange rate were lower than in September.
Inflation would be lower if the euro-dollar exchange rate were higher. In September the bank worked with a rate of 1,14. That is approximately the same as the rate used for the calculation in December. In short: the ECB's Excel sheet shows a significantly lower oil price and a more or less unchanged euro-dollar exchange rate. It would not be surprising if the ECB announced that inflation in 2019 will be slightly lower than the bank previously expected.
Effects
However, this could have significant consequences for monetary policy in the eurozone. The ECB currently expects inflation of approximately 2019% in 1,7. That is on the low side for the bank, which aims for annual inflation of around 2%. If the estimate shows that inflation will be even lower, this could cause the ECB to push back the moment of the first interest rate increase further.
The bank currently expects to do this in the fall of 2019. As do the prospects for economic growth deteriorate, then that expectation could completely take hold. The fact that the OECD has lowered its forecast for the eurozone may be a harbinger of the ECB's move. It cannot even be ruled out that the markets will develop expectations that the bank will continue to buy government bonds. However, I don't expect that.
The bar is (too) low
The bar for maintaining buybacks is much higher. This is because the ECB has often said it will stop and there is a lot of resistance to it within the central bank's board. The economists must adjust their forecast considerably and the board members must be convinced that economic growth will be considerably lower. Otherwise, the purchase of government bonds will not continue.
However, the bar for only allowing interest rates to rise later is a lot lower. Also because the Fed recently... major policy shift has made and there is now a good chance that the Washington central bank will not be able to raise interest rates at least 2019 times in 3.
In any case, I am eagerly looking forward to the ECB's press conference on Thursday, December 13, to see what the new estimates will be. And (just as importantly) to see what ECB President Mario Draghi will say about it.