The pace of the QE purchase program could be reduced to 30 billion euro a month
Investors would be parsing the ECB tone and language closely
Patient is no longer sick and doesn’t require the assistance
QE Length Could be extended
We do expect the QE process to be extended into 2018 for another nine months from its current expiry date (December). The pace of the QE purchase program could be reduced to 30 billion euro a month which would be nearly half of the current size. This means that the ECB would add another 270 billion to their balance sheet over the next period. The market is very much expecting this, anything which is above or below this number could trigger a surprise for the markets. Therefore, we do think that the ECB will reiterate that it is still fully committed to its program to strike a balance and the bank would confirm that it can change the pace and the path of the tapering for the QE as the markets conditions would require them
The Language and Tone
Investors would be parsing the ECB tone and language closely. The duration of extending the current QE program will very much dictate the market’s interest rate hike expectations. The shorter the duration, the more anchored the expectations would be for the upcoming interest rate hike. We do expect the interest rates to remain at their current level for an extended period of time. Mario Draghi, the president of the European Central Bank, would have a difficult task to convenience the market that these expectations are not going to change anytime soon
The phrase which would make the statement hawkish and dovish is “beyond if necessary”. The ECB uses this phrase when it talks about its asset purchase program and if the bank removes this phrase and extends the current program by only limited period, it would be perceived as a hawkish stance which could push the Euro higher
Locking the Door
The ECB launched its unpopular program to improve the health of the dying patient, the patient is no longer sick and doesn’t require the assistance. The unemployment rate in the Eurozone has fallen from its peak of 11.3 percent to 9.1 percent and the growth in the region is outpacing the biggest economy in the world- the US. Liquidity and credit situations even in the feeblest part of the Eurozone have improved remarkably, and the ECB has defeated the vicious cycle of falling prices i.e deflation.
Excuses For Draghi
The president of the ECB hasn’t achieved his inflation goal and the needle on that parameter isn’t moving at a pace which the president would like to have. The ongoing situation between Madrid and Catalonia has fuelled uncertainty in the market and the domino effect can never be underestimated, On top of that, the five star movement over in Italy, has gained a meaningful popularity amid Italians and with elections due next year, we do not think that the president of the European central bank is going to be overly hawkish.
