ECB: Greater longevity, flexibility and asymmetry in the APP – Goldman Sachs

Lasse Holboell Nielsen, Research Analyst at Goldman Sachs, notes that the ECB in its latest meet announced a continuation of its Asset Purchase Programme (APP) for a further nine months, from April 2017 to December 2017 (“or beyond, if necessary, and in any case [..] until a sustained adjustment in the path of inflation consistent with its inflation aim”).

Key Quotes

“The monthly pace of asset purchases will slow as from April 2017 to €60bn, from the current pace of €80bn per month. This is lower than we expected.”

“At the post-meeting press conference, President Draghi emphasised then longevity of the asset purchase programme. He mentioned several times that ‘tapering’ (which he defined as a gradual path of reduction to zero purchases) had not been discussed during the meeting. More specifically, Mr. Draghi stated that the Governing Council had chosen a nine-month extension at €60bn per month over a shorter six-month extension at a faster €80bn per month pace.  Mr. Draghi also emphasised that the ECB sought to maintain “a sustained market presence“ through extending the duration of the programme.”

“The Governing Council introduced greater flexibility into the implementation of asset purchases, introducing the possibility of increasing the pace and/or duration of the APP should the “outlook become less favourable“ or if financial conditions tighten excessively.”

“The new flexibility in the programme was styled as asymmetric. By contrast with the explicit signal of increased purchases should conditions deteriorate, Mr. Draghi described any prospects of moving below the €60bn monthly purchase pace as “far, far away.”

“In terms of the broader macroeconomic outlook, the ECB staff forecast was left essentially unchanged from September. The (new) ECB forecast for inflation in 2019 was 1.7%. Mr. Draghi characterised this forecast as “not really“ in line with the ECB’s objective (HICP inflation “below, but close to, 2%pa”), thus providing a macroeconomic rationale for the extension of asset purchases.”

“With latest announcements we maintain our forecast that the APP will continue through 2018 (at a progressively reduced pace from the €60bn per month we will see from April to December next year).”

“We maintain our view that the first ECB rate increase remains distant. We do not expect the first hike until end-2019, somewhat later than current market pricing.”