ECB preview: Leaning on the long end by other means - SocGen

Anatoli Annenkov, Research Analyst at Societe Generale, suggests that autumn has finally arrived, and with it the ECB’s decision on QE in 2018 and given its increasing efforts to anchor long-term policy expectations, worrying less about the monthly flows, theye are changing their call and now expect the ECB to extend QE for nine months, at a monthly pace of €25bn (vs. six months at €40bn before).

Key Quotes

“We expect the ECB to keep the door open to more QE thereafter if needed, and we maintain our rate hikes in March and June 2019 to put an end to the negative deposit rate. A key reason for our change is that the ECB finally seems convinced of the benefits of not depleting the limited bond universe when facing structurally weak inflation, allowing it to remain in the market for longer. Consequently, communication has shifted to the positive growth story, the need for patience and the continued impact of the size of the balance sheet.”

“Anchoring long-term expectations remains important, and we expect the current forward guidance to remain in place or even strengthen, with policy rates only expected to rise “well past” the end of the ECB’s net purchases. On the technical side, the ECB could shift its 2018 purchases, or reinvestments, to the long end of the yield curve, boosting the average maturity of the PSPP portfolio in anticipation of the expected decline in the extraction of duration risk once QE ends. While the ECB still has a few tricks up its sleeve, the gradual restoration of market pricing remains a key challenge.”