This website uses cookies in order to improve user experience. If you close this box or continue browsing, we will assume that you are happy with this. For more information about the cookies we use or to find out how you can disable cookies, see our Cookies Notice.

ECB specifies QE exit

The European Central Bank has decided on the fading out of its bond-purchase program along widely expected lines

This time around, the European Central Bank (ECB) has done a pretty good job in guiding the market ahead of today's critical meeting of the Governing Council. This was reflected in the unusually high degree of consensus of market participants' expectations and also in the fairly muted market reactions. Not bad, consider that with today's decisions, the ECB has entered a new stage in moving towards exiting its bond-purchase program has been decided. In detail, the ECB's Governing Council decided that:

  • key interest rates will remain unchanged (deposit facility rate at -0.40% respectively)

  • monthly net bond purchases will continue at the current pace of €60bn and be cut to €30bn per month from January 2018 onwards,

  • purchases at the €30bn are intended to last at least until September 2018 – or beyond, if necessary,

  • main purchasing parameters (issuer limit, country keys) will remain unchanged.

We expect net bond purchases to, at the very least, shrink further from September 2018 onwards, and to fade by the end of next year. We note, however, that the ECB kept a vague wording and left itself plenty of leeway. The way in which it did so probably contributed to the fact that market participants interpreted the decision in a slightly more dovish way than some had expected. As a result, German Bund yields and the euro ceded some ground, although their moves were not dramatic when compared to the trading ranges in recent days. The ECB stressed that rates will only increase long after net purchases have stopped. Partly, this was probably intended to avoid a further strengthening of the euro. We expect no rate hikes before 2019.

However, the ECB's decision was not quite as simple as it might appear in retrospective. Once again, the Eurozone's central bank was facing a dilemma. On the one hand, inflation figures and expectations remain low. On the other hand, the Eurozone economy has been developing better than expected. However, since the middle of June, the dollar-denominated price for a barrel of Brent oil has risen by 30%. Calculated in euros, that translates into a 22% increase, which could lead inflation to accelerate a bit. Furthermore, the euro's ascent that started in spring, ran out of steam since the start of September. That made the ECB's task a little easier.

Based on the monetary policy decisions and the ensuing press conference, we see no reason to change our forecasts in any significant way. We continue to expect yields on 10-year government bonds to rise to 0.8% by September 2018. We do not expect the euro to start soaring again in coming months. That has less to do with the political situation in the U.S. than interest-rate differentials. The gap has more than doubled over the past two years. Two-year U.S. Treasuries currently yield 2.3% more than their German counterparts, compared to 1% two years ago.

Related Articles

Jul 13, 2018 New Chart of the week

Chart of the week

China's monetary base looks set to grow faster again soon

Jul 06, 2018 Chart of the week

Chart of the week

On trade, the Trump administration might have some powerful allies.

Jul 03, 2018 Investment Traffic Lights

Investment Traffic Lights

Our tactical and strategic view

Jul 03, 2018 CIO Special

Dollar pros and cons

The dollar has already reached our target. Currently, the arguments are balanced.

Jun 29, 2018 Chart of the week

Chart of the week

Do weak currencies hurt emerging markets?

Jun 22, 2018 Chart of the week

Chart of the week

In the line of fire

Jun 21, 2018 Macro Outlook

Ten years after

The long reach of the financial crisis

Jun 15, 2018 Americas CIO View

Americas CIO View

Inflation: Sometimes it skips a generation

Jun 15, 2018 Chart of the week

Chart of the Week

Looking at real federal funds rates, not a lot has happened after 7 hikes

Jun 08, 2018 Chart of the week

Chart of the week

In some areas, Italy is actually doing quite well

Jun 04, 2018 Investment Traffic Lights

Investment Traffic Lights

Our tactical and strategic view

Jun 01, 2018 Chart of the week

Chart of the Week

Why emerging markets may be less vulnerable than they used to be

May 25, 2018 Chart of the week

Chart of the week

A tale of two economies in the Eurozone periphery

May 24, 2018 CIO Flash

Italy's new coalition

Italian political turmoil might prove less worrisome than many think.

May 18, 2018 Chart of the week

Chart of the week

Even U.S. corporations fear the impact of Donald Trump's trade politics

May 17, 2018 CIO Special

Free trade under attack

Common misconceptions and lessons for investors

May 17, 2018 Macro Outlook

A Closer Look

U.S. fiscal prospects: daunting challenges

May 11, 2018 Chart of the week

Chart of the week

Slowly, but surely inflation expectations are creeping up

Feedback

Please let us know what you think about this article/page.