ECB: No QE decision yet but the discussion is already high on agenda – Danske Bank

According to Pernille Bomholdt Henneberg, Chief Analyst at Danske Bank, there is no final decision on QE from ECB yet, but the discussion is already high on agenda of the governing council.

Key Quotes

“ECB’s main considerations regarding how to continue QE

• Capital key deviation: The ECB has allowed capital key deviation but with the German holding of bonds approaching the 33% limit, it becomes increasingly challenging for the ECB to continue to find alternatives. We expect the ECB to consider it necessary to find other ways to continue QE purchases instead of continuing only with additional deviations from the capital key.

• Stock versus flow: The minutes from the ECB meeting in July turned attention to the total stock of QE versus the effects of the monthly flow of the purchases. When the ECB reveals its strategy for QE beyond the currently communicated horizon, we believe it will argue it is adding more easing (higher stock), although we look for a slower pace of monthly purchases of EUR40bn (lower flow).

• Composition of purchases: Some ECB members have started to talk about QE composition and argued this can matter more than the size of purchases. In our view, this indirectly points to a higher share of corporate bond purchases, as an argument for including these bonds was that it would have a more direct impact on the economy. According to our estimates, the ECB is not close to its 70% ISIN limit on corporate bonds on an aggregate basis.

• Reinvestments: Related to the above stock versus flow effect, we believe the ECB will embrace the flow effects from the reinvestments when announcing the future QE path – and in our view lower monthly purchases.”