ECB to extend the Asset Purchase Programme (APP) by six to nine months - SocGen

In its December 2016 meet, Research Team at Societe Generale expects the ECB to extend the Asset Purchase Programme (APP) by six to nine months.

Key Quotes

“A key question will be whether the communication stresses only that the asset purchases will continue until this new end-date (as we think), or includes the monthly volume of €80bn until the new end-date. As this is forward guidance, the ECB can still adjust its actions as it sees fit depending on data. Current levels of uncertainty may argue in favour of unchanged monthly purchases, but then likely also a shorter extension.”

“In December 2016, we also expect an increase in the issue limit to 50%, while maintaining the issuer limit at 33%, to allow for a smooth implementation and make room for additional easing if needed.”

“We also expect the Eurosystem staff inflation forecast for 2019, due in December, to be close to the target (2018 is currently at 1.6%).”

“In March 2017, we expect a first reduction in the monthly asset purchases by €10bn with the ECB increasingly focusing on the continuous positive impact from the expanded balance sheet and excess liquidity.”

“We expect the inflation outlook, confidence in the effectiveness of past measures, rising concerns over adverse side-effects from UMP and the medium term scarcity of suitable assets to be the key underlying reasons for starting tapering.”

“We expect a TLTRO 3 to be offered as of June 2017 to support a still-lacklustre recovery in investment. This could counter negative market effects from tapering by adding some €200bn to ECB’s balance sheet until March 2018. Additional TLTROs thereafter are possible depending on the economic outlook while, importantly, including mortgage loans could be a way of boosting volumes significantly.”