ECB review: Oops, we did it again! - Natixis

Johannes Gareis, Research Analyst at Natixis, notes that the ECB did it again and eased its monetary policy stance and left the key policy rates unchanged.

Key Quotes

“However, the central bank extended its QE programme to December 2017 and trimmed the pace of monthly asset purchases to EUR 60 bn a month (from April 2017). Like in the past, the ECB indicated that its QE programme is basically open-ended, saying that asset purchases will continue as long as necessary and in any case until the ECB sees “a sustained adjustment in the path of inflation consistent with its inflation aim”. To address the likely shortage of sovereign bonds for its QE programme, the ECB adjusted the parameters of the QE programme as follows (as of January 2017): i) the minimum eligible bond maturity is brought down from 2 years to 1 year and ii) the ECB will buy assets yielding below the deposit rate, if necessary.”

“Furthermore, the ECB issued updated staff forecasts on growth and inflation, including 2019 projections for the first time. The 2016 inflation projection was unchanged at 0.2% but the inflation projection was revised up to 1.3% (1.2%) for 2017 and down to 1.5% (1.6%) for 2018. The ECB expects inflation to reach 1.7% in 2019, which is still a little bit below its target of close but below 2%. The ECB’s forecast for GDP growth is 1.7% for 2016, 1.7% (1.6%) for 2017, 1.6% (1.6) for 2018 and 1.6% for 2019. We are surprised by the relatively high growth projection and the relatively low inflation projection. In particular, we expect a sharper rise in inflation next year (1.5%) as oil prices ramp up energy prices.” 

“We and the majority of market observers had expected the ECB to extent the QE programme by six months from March 2017 to September 2017 and to keep the pace of monthly purchases unchanged at EUR 80 bn. In light of this, the reduction of monthly purchases to EUR 60 bn may appear as a slightly hawkish shift and some may say that the “tapering genie” is ultimately out of the bottle. We do not think so, however. First, there is little difference between purchasing EUR 80 bn in assets per month for six months (+EUR 480 bn) and purchasing EUR 60 bn in assets per month for nine months (+EUR 540 bn). Second, and more importantly, the ECB did not signal that the pace of asset purchases is likely to slow down further in 2017, or, as Mario Draghi has put it in the press conference, “a reduction in purchases to zero has not been on the table”.” 

“Overall, the ECB President tried to put the “tapering genie” back in the bottle today, despite the reduction in the pace of monthly asset purchases. We think that the ECB will neither increase nor decrease its monetary stimulus over the coming months. But judging from our more bullish view on inflation, we think that the ECB’s next step is later in 2017, when the ECB should guide the market how it plans to end asset purchases after December 2017.”