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ECB: chi va piano, va sano.

Contrary to what we expected, the ECB ultimately did not announce any time extension for its asset-buying programme (QE), which, for now, is supposed to wrap up in March 2017. On the other hand, the Governing Council has the relevant ECB committees to “evaluate the options that ensure a smooth implementation of our purchase programme”. This certainly would not have been the case if the ECB were not planning to extend its QE after March 2017, because it would have been possible to find a short-term solution. Redirecting the central banks of countries that no longer have enough domestic sovereign bonds toward supranational bonds would have made it possible to keep going until March 2017. As such, it is highly likely that at the December Governing Council meeting, the ECB will announce it is extending its QE to September 2017 at least. In addition, ending QE in March 2017 would cause the euro to appreciate prematurely, which would immediately compromise the fight against deflationist pressures. You will recall that the Fed's QE "tapering" in 2014 more or less coincided with the start of the US dollar's strong appreciation.

In reality, the ECB did not need to rush. Its projected inflation (1.2% in 2017 and 1.6% in 2018, instead of 1.3% and 1.6%, respectively), and growth (1.6% in 2017 and 1.6% in 2018, instead of 1.7% and 1.7%) are virtually unchanged. The Brexit victory has not sent eurozone activity off the rails, nor should it. It is important to stress that economic growth has been remarkably stable over the past two years. In addition, long-term inflation expectations and the euro's effective exchange rate - two key variables for the ECB - have also been relatively stable in recent months. That said, these two variables would be immediately affected (downward for the first, and upward for the second) if the markets were to doubt the ECB's will to continue its QE.

The ECB's leisurely approach is fending off questions for a good while about potential additions of asset classes to the Eurosystem's securities shopping list, and about "helicopter money". Mario Draghi also brushed aside these possibilities during his press conference.

It is now clear that PSPP rules will be changing shortly. The big question is whether the Eurosystem will abandon the ‘capital key rule’ (securities purchases pro-rated to the country's weighting in the ECB's capital). Mario Draghi indicated that this measure, among others, would be looked at by the ECB’s committees. For the time being, sovereign securities purchases (PSPP) have only very marginally departed from this rule, with a slight overweighting on the zone's "Big Four" countries, offsetting the proximity to the holding limit for Portuguese and Slovakian securities. As a result, the average maturity of Bund purchases has climbed gradually and was up to 11 years in August. This number will move higher still in the months to come and will contribute for some time to further flattening of the German yield curve. Abandoning the ‘capital key rule’ would at least have the advantage of mitigating the pressure on German yields, which would satisfy many players, Germany included.

End- of-QE-programmes
DRUT Bastien , Fixed Income and FX Strategy
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ECB: chi va piano, va sano.
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