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ECB struggles with self-defined boundaries

The European Central Bank (ECB) knows it can’t change its loose monetary policy too rapidly, lest it shock markets and banks. But change will have to come soon, maybe as soon as Thursday when governors meet again.

Market pundits are expecting the first hints from Mario Draghi on Thursday as to when an exit from the ECB's bond-buying program would be thinkable. The ECB president has indicated he will inform the public in the fall when and if the monthly 60-billion-euro ($71-billion) asset purchase scheme will be reduced. It would be disappointing to get no hints from Draghi this Thursday, September 7.

After all, the self-defined boundaries of the bond-buying program are well in sight already. The ECB has stipulated that it must not buy more than 33 percent of bonds from a given issuer. This limit will be reached in summer next year for German sovereign bonds, and six months later for bonds issued by France, Italy and Spain. After that, the ECB would be facing several cluster risks at the same time.

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Self-sustained upswing

And then there's something else that has fostered analysts' hopes for hints toward a less expansive monetary policy — something that many Europeans can feel on a daily basis, namely that their economies are now doing a lot better. The ECB board of governors can refer to the latest research data provided by their economists, and Draghi has said he wants to see the latest figures before taking any decisions.

According to the minutes of their previous meeting, governors confirmed that the eurozone economies were increasingly self-sustained and hence less dependent on the current ECB policy of accommodation. Commerzbank analyst Michael Schubert expects Mario Draghi "to provide a first hint of the ECB reducing its bond-buying activities in 2018."

A picture of European Central Bank chief Mario Draghi

Conflicting pressures are squeezing Mario Draghi: a stronger euro and still-sluggish inflation could justify prolonging the bank's asset purchases, but it is approaching the legal limits of the scheme and may be forced to wind it down

Strong euro a troublemaker

But there are also arguments against a tighter monetary policy. After all, the ECB could change its self-proclaimed boundaries. Even if the eurozone economy as a whole expands by 2 percent this year, there's no guarantee that inflation will pick up accordingly.In August, it did rise to 1.5 percent on an annualized basis, up from 1.3 percent in the previous month. But the main driver behind that pickup was rising energy costs.

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ECB policy seen as less than stimulating

By contrast, the core inflation rate — a measure excluding energy and food prices — remained unchanged at 1.2 percent. In addition, an increasingly stronger euro is bound to make energy imports less expensive and lead to a lower inflation rate. But that's to the ECB's liking as it recommends a rate of close to, but little under, 2.0 percent.

That means the stronger euro may have taken the wind out of the central bank's sails and its attempts to slowly change its monetary policy. Sebastian Sachs, an economist with Bankhaus Metzler, insists that the southern European members of the bloc still depend on the economic effect of ultra-low interest rates.

"The ECB is unlikely to restrict its monetary policy before the elections in Italy," the chief strategist of Merck Finck Privatbankiers, Robert Greil, said, adding a political dimension to the issue.

Savers keep getting a bad deal

UBS Europe Chief Economist Reinhard Cluse thinks the ECB will keep a low profile on Thursday and will aim to talk the euro down without a real change in its monetary policy. He reckons the lender will announce a reduction of its bond-buying program to 40 billion euros a month on October 28 only, without specifying a final date for the program.

If that happens, savers will know that interest rates will remain ultra-low.

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