ECB ready to scale back QE - Danske Bank

The next European Central Bank meeting will be on October 26. Analysts from Danske Bank, expect the central bank to announce an extension of the massive purchase program by nine months at a pace of EUR30bn. 

Key Quotes: 

“In line with recent ECB communication which points to a preference for a ‘lower for longer’ scenario, we change our call and now expect the ECB to announce a QE extension by nine months at a pace of EUR30bn at the meeting on 26 October. After that, we expect the ECB to end its QE purchases in Q4 18. In our view, a larger scaling down of purchases would ease future QE implementation and higher reinvestment volumes of maturing bonds will also add to the monthly QE flows in 2018. The appreciation pace of the effective euro has slowed since September and is hence less of a headache for the ECB now.”

“According to our projection, inflation will stay below the ECB’s target in 2018. However, we do look for core inflation to remain above 1.0% for the rest of 2017 and 2018, which would be an important argument in the ECB’s QE recalibration decision. 

“We expect the QE extension to be implemented with continuing capital key deviations, while we also consider it likely that the ECB will buy a higher share of corporate bonds, as these purchases will have a more direct economic impact and the ECB’s holdings are not close to the 70% ISIN limit.

“Apart from a scaling down of QE purchases, we expect the ECB to make no changes to its forward guidance at the upcoming meeting. We also believe it will retain the option to extend the QE horizon or scale up purchases again if the inflation outlook deteriorates. Markets currently expect the first hike only in mid-2019, which we think is fair.”