ECB to announce another extension to its monthly asset purchases – BMO CM

Research Team at BMO Capital Markets, notes that the ECB’s mandate is to maintain price stability, defined as “a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below, but close to, 2%.”

Key Quotes

“It is very disappointing that, with economic growth recovering, the latest Euro Area inflation rate is just +0.6% y/y—far from being anywhere near 2%. Even when energy prices are removed, CPI is up just 0.8% y/y. Since Mr. Draghi’s first meeting as ECB president (November 2011), inflation has gone from 3.0% to 0.6%, despite cutting the refi rate from 1.50% to 0%, lowering the deposit rate below zero, buying €80 bln worth of government bonds per month, and introducing TLTRO (in June 2014) along with TLTRO II and CSPP (in June 2016).”

“Expect the ECB to announce another extension to its monthly asset purchases when it meets today. The program is currently slated to end in March 2017, but since the beginning of time, it seems, the disclaimer “or beyond, if necessary” was included. Well, it is necessary… again. Currently, we look for the timeframe to be extended six months to September 2017, but there are reports that it won’t be that simple. Policymakers are considering a longer timeframe (beyond six months) but with fewer bond buys per month (so, less than €80 bln, or possibly a return to €60 bln). This will be the ECB’s signal to financial markets that the QE program has a limited shelf life and it won’t hurt that Germany would give it the nod. However, don’t write the ECB’s easing program off too quickly. There are many ongoing problems in the Euro Area to contend with, many of which are political. Any worries about the resilience or longevity of the euro may push borrowing costs higher in coming months, which will require the attention of the ECB.”