ECB opts for ‘lower-for-longer’ QE extension

• ECB opts for a ‘lower-for-longer’ QE extension in 2018 and leaves forward guidance unchanged as we expected.
• ECB will publish details on reinvestment from November 2017 onwards.
• EUR/USD range bound for now, but the ‘smell of exit’ could bring cross back to the 1.20s in 2018.
• Continued support for peripheral-core EU spreads and Scandi covered bonds.

In line with our expectation, the ECB today announced an extension of its QE programme until September 2018, but also scaled down its asset purchases to EUR30bn from January 2018 onwards. Importantly, the ECB also left its forward guidance unchanged and retained the possibility to extend the QE programme in size and/or duration, leaving it open-ended. The ECB reiterated that policy rates will remain at their current levels for an extended period of time and well past the horizon of asset purchases. During the press conference Draghi clarified that no changes in the QE parameters and the sequencing on interest rates were discussed at today’s meeting.

The ECB’s QE scale down decision reflected growing confidence by the Governing Council that inflation will eventually converge to target based on an increasingly robust and broad-based economic expansion in the eurozone, an uptick in measures of underlying inflation and continued favourable financing conditions due to accommodative monetary policy measures. Nevertheless, inflation pressures remain muted and hence the ECB stressed the continued need for monetary support through the net QE purchases, forward guidance on interest rates and forthcoming reinvestments.

The introductory statement now also excluded any reference to the risks from exchange rate volatility, which is, however, not so surprising given that the effective euro appreciation pace has abated significantly since September, which we think matters more for the ECB than the exchange rate level as such.

ECB releases more details on QE reinvestments in 2018

The ECB also released further details on the reinvestments of maturing bonds which are made alongside new QE purchases and which will become increasingly sizable over the course of 2018.

1. Time horizon: Reinvestments will be made ‘for an extended period of time’ after the end of the net QE purchases and ‘for as long as necessary’.

2. Composition: From 6 November 2017 the ECB will also now publish the expected monthly redemption amounts for the QE programme over a rolling 12-month horizon as well as historical redemption figures since the start of QE. The data will provide redemptions information for each of the four components (PSPP, CSPP, CBPP3 and ABSPP), but not reveal the individual country breakdown.

3. Timing: Reinvestments will be flexible and made in the month they fall due or otherwise in the subsequent two months, if warranted by liquidity conditions.

4. No change in country composition for now: Reinvestments will be made in the jurisdiction in which the maturing bonds were issued, during the period of net asset purchases.

Overall, we think the ECB’s communication will increasingly focus on the reinvestments and the stock rather than the flow of QE purchases in the future, as it gradually scales back monetary stimulus over the coming years.

Download the full report