ECB: It’s a marathon not a sprint

With regard to its unorthodox monetary policies, the ECB Governing Council today agreed several modifications (http://www.ecb.europa.eu/press/pr/date/2016/html/pr161208.en.html). While the ECB’s bond purchases within the framework of its Asset Purchase Programme (APP) will continue unaffected, however from April 2017 onwards securities amounting to a maximum of EUR 60bn are to be bought until the end of the year and beyond. Nevertheless, the ECB has left a loophole open. Should the economic outlook worsen over the coming months, thereby making the inflation target seem unrealistic, the ECB reserves the right to increase the scope and/or duration of its monthly purchases. In addition to the monthly purchases of EUR 60bn, repayments of bonds falling due, which had up until now been acquired within the scope of the APP, will be reinvested from April as well. In contrast to previous years, which have been characterised by wave after wave of new ECB measures, the coming year is expected to be dominated by increased stability in monetary policy.
In order to avoid bottlenecks in the supply of securities, above all with regard to German government bonds, adjustments were made to purchase regulations. The ECB now intends to purchase bonds with terms of up to a single year (previously two years). In addition, the yield floor in the form of the deposit facility rate at a current level of -0.40% now no longer applies where necessary (this decision can be made at any time). These measures serve to address in particular a possible shortage of German government bonds during stress phases.

The reduction of the monthly purchase volume by EUR 20bn to EUR 60bn should not be interpreted as the beginning of a tapering-out period. The decision to increase the monthly purchase volume originally taken in March of this year must be viewed against the background of a negative inflation rate at this time as well as ongoing concerns related to potential deflationary trends. The recent rise in inflation and the corresponding reduced fears of deflation have therefore justified, in the eyes of the ECB, the decision to cut its bond purchases.
To this end, Mario Draghi has underlined several times that the agreed reduction should not be regarded as tapering in the classic sense of the word. A discussion centred on the gradual termination of securities purchases was not held during the ECB Council Meeting, according to the ECB President’s comments. He was rather more inclined to confirm that the ECB intends to be active on the bond market for a long time yet, so as to implement its monetary policy objectives. He clearly and repeatedly rebuffed tapering speculation during the press conference.

Regarding the ECB’s low inflation expectations for 2017 (1.3%), 2018 (1.5%) and 2019 (1.7%), all of which remain below the ECB’s own target values, we believe that the ECB’s decision today signals an intention to heed the old adage “it’s a marathon not a sprint”: the central bank will once again return to a slower andante tempo (EUR 60bn per month) following the more allegro pace of the preceding months. Bond purchases of EUR 60bn per month are, after all, still a significant economic stimulus. In addition, papers falling due are to be reinvested, so that the monthly purchase volume is set to be well above the EUR 60bn mark from April 2017 onwards. The reduction of monthly bond purchases should not be interpreted as a withdrawal from the QE programme. In doing so, the ECB is simultaneously creating sufficient leeway for further purchases. In the medium term, i.e. with a view to 2018, the capital markets will be forced to wean themselves off monetary stimuli programmes.

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