ECB review: Warming up to QE extension in October – Danske Bank

The ECB left its policy measures unchanged and President Mario Draghi confirmed that the bulk of decisions regarding the QE purchases beyond 2017 will most likely be taken in October, notes the analysis team at Danske Bank.

Key Quotes

“There was a lot of focus on the exchange rate development and during the introductory statement Draghi mentioned the euro appreciation three times, saying that ‘the recent volatility in the exchange rate represents a source of uncertainty that requires monitoring’. Notably, the FX market did not perceive Draghi as dovish enough to counteract the strong underlying momentum and EUR/USD ended higher. In fixed income markets, the periphery was the big winner, reflecting it is now deemed more likely that the QE programme will continue in 2018.”

“The discussion about how to continue the QE programme beyond 2017 has started and Draghi gave some insights. First of all, the sequencing in the exit strategy was not discussed, hence it was confirmed that policy rates will remain at their present levels after the QE programme has ended. Secondly, the ECB did not consider lifting the 33% issue/issuer limits. Related to this, the ECB did not discuss scarcity issues but Draghi argued that the ECB has repeatedly shown its ability to deal with this. Instead, focus was on the length and size of the programme including pros and cons of different scenarios for the future purchases. In addition, Draghi opened up for higher purchases in France, Italy and Spain and lower ones in Germany and the Netherlands where the holdings are approaching the 33% limit, as he said there has always been and will always be deviation from the capital key distribution.”

“We still believe the ECB will announce a reduction in its QE purchases to EUR40bn per month in H1 18 at the next meeting in October. The programme should be continued without lifting the 33% limits, but instead be based on continued capital key deviations. We also consider it likely that the ECB will buy a higher share of corporate bonds. These purchases will have a more direct economic impact and the ECB’s holdings are not close to the 70% ISIN limit.”