by Macroview While we expect no concrete action at this week’s policy meeting, we believe extension of QE is coming and bond scarcity issues will be addressed. We do not expect any new action to be announced at the ECB’s policy meeting on Thursday, but we do expect that the ECB will reiterate that the size of its asset-purchase programme and its duration are exclusively a function of the inflation outlook. We also expect that the bank will hammer home the message that it has the flexibility to adjust the parameters of QE as circumstances dictate.We still expect quantitative easing to be extended by six months at the ECB’s 8 December meeting, with asset purchases continuing at the current EUR80 bn pace until at least September 2017 (instead of the current soft deadline of March 2017), followed by a gradual tapering starting in Q4 2017. A six-month extension at the current pace would add EUR480 bn to asset purchases and provide a boost to inflation of up to 0.3 percentage point, even accounting for diminishing marginal benefits. Starting from a long-term (2018) forecast of 1.6%, such an extension should be seen as enough to bring inflation back closer to the ECB’s target of 2% inflation by 2019.We also think ECB head Mario Draghi will maintain a very dovish bias for now and that he may use the Thursday meeting to dismiss the idea of premature tightening.
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Frederik Ducrozet considers the following as important: ECB bond scarcity, ECB inflation, ECB policy meeting, ECB tapering, Macroview
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While we expect no concrete action at this week’s policy meeting, we believe extension of QE is coming and bond scarcity issues will be addressed.
We do not expect any new action to be announced at the ECB’s policy meeting on Thursday, but we do expect that the ECB will reiterate that the size of its asset-purchase programme and its duration are exclusively a function of the inflation outlook. We also expect that the bank will hammer home the message that it has the flexibility to adjust the parameters of QE as circumstances dictate.
We still expect quantitative easing to be extended by six months at the ECB’s 8 December meeting, with asset purchases continuing at the current EUR80 bn pace until at least September 2017 (instead of the current soft deadline of March 2017), followed by a gradual tapering starting in Q4 2017. A six-month extension at the current pace would add EUR480 bn to asset purchases and provide a boost to inflation of up to 0.3 percentage point, even accounting for diminishing marginal benefits. Starting from a long-term (2018) forecast of 1.6%, such an extension should be seen as enough to bring inflation back closer to the ECB’s target of 2% inflation by 2019.
We also think ECB head Mario Draghi will maintain a very dovish bias for now and that he may use the Thursday meeting to dismiss the idea of premature tightening. The fundamental reason for continued dovishness is core inflation, which, at 0.8% y-o-y, still lacks any upward momentum. This raises concerns over potential hysteresis and second-round effects on inflation expectations. But given the tapering rumours, stronger QE guidance would be welcome, including more details on the quantitative criteria (notably core inflation) that need to be met before the ECB can taper its asset purchases.
If QE rules were to be eased as soon as this week rather than in December, it would provide a strong signal that the ECB is concerned about the scarcity of German Bunds eligible for its asset purchase programme. But there is no shortage of technical options to deal with this scarcity. On balance, we expect the ECB to deal with this issue by increasing issue-share limits for some (non-Collective Action Clause) bonds and to allow for greater flexibility relative to capital-key rules.