ECB Preview: Quantitative easing extension knocking at the door – RBS

Research Team at RBS, is not expecting any changes to interest rate settings or to the size and scope of the asset purchase programme (APP) at today’s ECB meeting but are expecting the extension of the APP from March 2017 to September 2017.

Key Quotes

“There are reasons to delay a policy response until December. Bank lending flows have picked up a little in recent weeks. ECB staff forecasts are not that far off track notwithstanding the Brexit shock and a still-difficult global growth environment. And the ECB may prefer to announce an extension to its forward guidance on the APP at the same time as fully explaining the technical changes it will make to the programme to make the extension viable. We doubt details can be prepared as soon as this week. Cœuré indicated in his Jackson Hole speech that the ECB is still considering the side effects of negative deposit rates (and the ECB’s policy stance more generally) may be greater than the ECB had envisaged.

However we think the ECB is more likely to extend its forward guidance now rather than delay what we believe to be an inevitable adjustment to the programme to a later date. Mr Draghi has been emphasising that global and domestic growth risks remain tilted to the downside. He will need to note as well that inflation expectations are still not that far off record lows despite a higher oil price and the bolder-than-expected package of easing measures launched earlier this year.

PSPP2 to PSPP3. Different, not just bigger. Extending forward guidance on QE to late 2017 will require significant change to the programme. The issuer limit is arbitrary and should go, as should the maturity limit (31y). But to credibly extend its purchases of Germany, the Netherlands, and Finland, it must (i) choose to relax the issue limits for individual bonds, (ii) buy at yields below the deposit rate, or (iii) abandon the capital key for PSPP quotas entirely. We think that this will prove the order of preference: the issue limits should be relaxed.”