ECB Watch: The ECB delivers a “down size” of the APP

  • The ECB has opted for an alternative way to taper QE, downsizing monthly purchases to 30 bn euros
  • The Asset Purchase Programme remains open-ended, extended until September 2018 or beyond
  • The size of the ECB’s balance sheet and forward guidance will replace net purchases as the main tool for monetary policy

As widely expected, the ECB has unveiled the APP recalibration. As regards non-standard measures, the central bank decided: i) to extend the asset purchase program (APP) until at least Sept 2018 but at a monthly pace of EUR30 billion (until December 2017 the program will run at the currently monthly pace of EUR60 billion), ii) to reinvest the principal payments on the securities purchased under the APP as they mature for an extended period of time after the end of the net asset purchases, and as long as necessary and, finally, iii) to extend the FRFA (fixed rate tender procedures with full allotment) at least until the end of 2019.

Mr. Draghi said that today´s decision was not unanimous, but he highlighted that there was a broad consensus on some issues and a large majority on others. The tone remained dovish; the easing bias was retained as the central bank reiterated its willingness to act further if needed. “The Governing Council (GC) stands ready to increase the APP in terms of size and/or duration.”

On standard measures, key interest rates were left unchanged, as expected, and the ECB reiterated its pledge to keep them unchanged “until well past the horizon of the net asset purchases”. For the economic outlook, the tone has genuinely improved while risks remain broadly balanced.

During the press conference, the focus was on the following issues:

  • The recalibration of the APP. This recalibration reflects growing confidence in the gradual convergence of inflation towards the target. Mr. Draghi wanted to underline that the euro area still needs an “ample" degree of stimulus ("very substantial" was used in previous statements) as “domestic price pressures are still muted overall and the economic outlook and the path of inflation remain conditional on continued support.” Mr Draghi also took the opportunity to highlight that the program is open-ended and is not going to stop suddenly. “It's never been our view that it should stop suddenly," which leaves the door open to running the program until the last quarter of 2018. Last, but not least, the decision of recalibration was not unanimous, as some members of the GC had preferred to announce a close end-date for QE. The ECB also wanted to separate itself from Fed style on the recalibration plan (this option would have implied a linear scaling back of the asset purchases). All in all, the recalibration was broadly in line with market’s expectations after the ECB´s communication over the last few weeks, particularly regarding its horizon.
  • The reinforcement of the ECB´s forward guidance (apart from maintaining the “sequence”) by: o Reinvesting the principal payments of the securities purchased under the APP. Mr Draghi stressed that this is quite an important measure with the aim to maintain the degree of monetary accommodation and favorable conditions for liquidity for a long time. He wanted to emphasize that even when purchases will end, the amount of bonds under APP would stay huge. The ECB also announced that it will publish on a monthly basis (starting next month) the amount of expected monthly redemptions.
  • Extending the FRFA. The ECB decided to continue “conducting the main refinancing operations and three-month longer-term refinancing operations as fixed-rate tender procedures with full allotment for as long as necessary, and at least until the end of the last reserve maintenance period of 2019.
  • The size of the ECB’s balance sheet and forward guidance will replace net purchases as the main tool for monetary policy

As expected, the ECB has adopted a flexible strategy and an open-ended program i.e. contingent upon the evolution of economic conditions, in order to guide market expectations. They opted for a longer extension of the program as a way of anchoring interest rate expectations (and, by extension, the euro, which has disappeared from the ECB’s radar) and trying to cope with the volume of sovereign bonds available under the current APP rules (as the scarcity of bonds will eventually be an issue for the ECB). In any case, today the ECB has taken another stealth step on the normalization process.

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