Christmas mood leaves QE exit decisions for 2018

Despite a stronger growth and inflation outlook, the ECB delivered a fairly balanced policy message, without further hints about a shift towards a more 'holistic' view on inflation and the economy. We expect discussions about QE exit and policy normalisation to gain prominence in the spring of 2018.

ECB sees euro zone heading in ‘the right direction’ – we see EUR/USD headed firmly into 1.20s in 2018

In line with our expectation, the ECB left its policy measures and forward guidance unchanged, keeping the QE programme open-ended (see also Preview). The ECB reiterated that policy rates would remain at current levels for an extended period and well past the horizon of asset purchases. The Q&A also brought little news as Draghi confirmed that both the new QE composition and a possible decoupling of the QE forward guidance from the inflation outlook were not discussed at the meeting.

Although Draghi stressed that the Governing Council is growing more confident in its ability to meet the inflation target eventually, not least because of the stronger growth outlook, today’s meeting confirmed that the ECB is in a wait-and-see mode for now and any further discussions about QE exit and policy normalisation would probably only gain prominence in the spring of 2018. Related to this, we think it is important to watch out for growing support within the Governing Council for the idea of decoupling the forward guidance on QE from the requirement for a sustained rise in inflation and instead linking it to the overall monetary policy stance, as this would enable the ECB to end QE even if inflation continues to undershoot the target. Such a change in the forward guidance might come for example in the April or June meetings next year.

We still believe the ECB will end the QE programme in 2018 and taper purchases to zero in Q4 18, due to a combination of binding technical restrictions, the growing size and importance of QE reinvestments, fading deflationary risks with core inflation staying above 1.0% and a growing consensus within the Governing Council that the October QE extension was the last one. Given gradually rising underlying inflation pressures, we expect the ECB to deliver its first 10bp deposit rate hike in Q2 19, supported by a growing urge in the Governing Council to move ahead with monetary policy normalisation in order to regain room to manoeuvre for future crises and avoid falling behind the curve.

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