ECB to outline the main elements of how the QE programme will function – RBC CM

An announcement on the ‘bulk’ of the ECB’s decisions on the future of its QE programme is now firmly expected next week, according to analysts at RBC Capital Markets.

Key Quotes

“Though we may have to wait until the next meeting in mid-December for some further details, this meeting should see the ECB outline the main elements of how the QE programme will function from January onwards.” 

“Our expectation is that the announcement will include a reduction in net purchases starting from January 2018. We expect that reduction will be by at least €30bn in net terms, possibly even more, to bring net purchases to around €30bn per month from the current €60bn.” 

“In advance of the last meeting we proposed a gross target of €40bn/month amounting to roughly €30bn in net terms, too.”

“At that stage we expected the ECB to maintain a dovish stance even as it made changes to the QE programme. In particular, we argued that given the ‘sequencing’ signalled by the forward guidance, the length of time the QE programme runs for mattered more than monthly size.”

“Since the last meeting it looks as if the ECB’s thinking has moved in that direction. A recent ‘ECB sources’ story suggesting that the GovCo was considering a nine-month extension to the programme but with a sharper reduction in monthly purchases echoed a speech given by ECB Chief Economist Peter Praet in London on October 2nd in which he set out his preference to run purchases ‘lower but for longer’.”

“Our expectation is that the programme will run for at least nine months from its current end date (i.e. to September 2018) with the changes accompanied by a reinforcing of the current forward guidance particularly the language on ‘sequencing’ and on retaining the option to maintain purchases for longer than any initial extension, i.e. the ‘or beyond, as necessary’ part of the language will remain to keep the programme as open-ended as possible.”

“A further slippage of the capital key in net holdings is quite possible given the pattern of redemptions in coming years though we don’t expect that it will be explicitly abandoned. Our view is that the ECB is more relaxed about slippages from the capital key than its public statements would suggest.”

“We doubt that the ECB will officially guide markets as regards the split between sovereign and nonsovereign purchases, but there could be some indication that its preference is to allow public sector purchases to bear the brunt the reduction in purchases as part of an overall strategy to signal that the programme can be kept running for longer.”

“For markets, we still like fading any positive readings in EONIA forwards, and we still think that markets are too optimistic as regards interest rate hikes going forward. In fact, the entire 0-5y part of the curve should be underpinned by the ECB’s anchoring of short rate expectations. On the flipside, we think that the curve can steepen from both ends. With a higher reduction in actual purchases, the term structure might have to correct upwards somewhat – particularly if the international yield environment drifts higher anyway. We like EUR 2y-30y and 5y-30y steepeners still. Furthermore, we see little risk for spread products from the ECB’s taper and thus would expect credit and peripheral sovereigns to do well.”