ECB set to announce tapering at today’s meeting – Rabobank

Analysts at Rabobank suggests that even though ECB hasn’t met its inflation objectives yet, it looks set to announce tapering at today’s meeting.

Key Quotes

“It has been our long-held view that the ECB’s self-imposed constraints will eventually see the central bank run out of room to conduct its asset purchase programme. Until recently, members of the GC had always denied any concerns about a supply shortage, but in the past weeks anonymous leaks suggest that some members are starting to see the programme’s limitations. Based on our calculations, we believe that that there should be about EUR 220bn worth of purchases left across the entire purchase programme.”

“Even as the ECB hasn’t met its inflation objectives yet, it looks therefore set to announce tapering at today’s meeting. We believe that QE will be wound down in three steps of EUR 20bn, with the intention of bringing purchases to zero in 2018H2 but also implicitly tying the actual wind down of the asset purchases a little more to the current economic conditions. At the same time, we recognise that there are countless of other realistic scenarios. Most of these are of the ´pre-committed’ kind, such as x months at a pace of EUR y bn/m, but we then will eventually see relatively sharp ‘cliff’ effects, or, in case economic conditions deviate significantly from current projections, a cornered central bank. Even though our base case scenario is seen as relatively hawkish, and would probably provoke such an initial market reaction, a flexible and gradual approach to tapering would have the most benefits on balance.”

“It’s not only the future of QE that will be discussed at today’s meeting. Some ECB officials noted that a broad re-evaluation of the ‘overall stance of monetary policy’ should be considered. This is where the ECB’s forward guidance comes to the fore. The ECB currently expects rates to remain at present levels ‘well past’ the horizon of the net asset purchases, but this formulation will lose some of its meaning. This issue could be tackled with a new pledge that there will be low rates until the inflation aim has been achieved.”