ECB: Stock effect is more powerful than the flow effect - Rabobank

Analysts at Rabobank suggest that one final piece to the mix of market boosting news came from the ECB’s Excecutive Board member Peter Praet. The institution’s chief economist argued in a speech in London that whilst “frontloading” of asset purchases may be preferable in times of high uncertainty, the market may be better able to deal with a protracted program with lower purchase amounts in more normal market conditions, they further adds.

Key Quotes

“One interpretation of this comment is that Mr. Praet believes that such a protracted program will ultimately lead to a higher stock of assets than without it (thus keeping a lid on long-term rates). But an alternative (and perhaps more likely) view is that by doing so the ECB is able to maintain a certain flow (at a lower level but for longer). This, then, would suggest that Mr. Praet believes the “flow effect” is still quite important, even if it is a much lower pace.”

“We believe that the stock effect is more powerful than the flow effect. But this is only one reason why our base case for ‘tapering’ remains for a cutback in the Asset Purchase Program to EUR40bn as from January 2018 onwards, followed by further cutbacks in the March and June meetings. Our thinking is centered around the premise that i) cutting back is necessary for technical reasons and ii) the hawks in the Council want to get rid of the purchase program altogether and that the strong economic backdrop is allowing this. However, Mr. Praet’s comments suggest that at least one alternative to a full cutback towards zero by (around) the middle of next year (our baseline view) could be a much more extended purchase program, but at a (significantly?) reduced level.”