"What The ECB Will Announce This Week: A Summary Of All QE Tapering Scenarios"
From ZeroHedge:
The main risk event in the coming week, in addition to a barrage of
corporate earnings, will be the ECB's long-awaited announcement of what
the central bank's QE tapering will look like.
Conveniently, thanks to a
trial balloon released on October 12, we already know the general parameters of this phasing out of monetization: ECB officials are considering cutting
their monthly bond buying by at least half, from €60BN to €30BN,
starting in January and keeping their program active for at least nine
months, with some potential reference to a lengthening of the maturity
of purchases.
According to a Bloomberg survey, the ECB will likely keep buying for about nine months to take the program to just over €2.5 trillion, respondents said before the ECB’s Oct. 26 decision. That’s
consistent with what some officials see as the limit in the market
under current rules. ECB President Mario Draghi is predicted to announce
his first interest-rate increase in early 2019.
According to Bloomberg,
"such an outcome for quantitative easing would soothe the concerns of
policy makers who want a definite signal that the program will end,
while giving succor to those who want to keep stimulus flowing as long
as the inflation outlook remains lackluster. It doesn’t resolve the
question of what happens in a year if consumer-price growth still isn’t
on track to the ECB’s goal."
“There has been no dissenting voice at the ECB ahead of the meeting
on the need to scale down net purchases,” said Maxime Sbaihi, an
economist at Bloomberg in London. “So the question is less ‘if’ they
will taper than the details of ‘how’ they will do it.”
Why not taper more? Simple: Mario Draghi is terrified of starting
another bond (or stock) tantrum, if investors are spooked that the ECB
is withdrawing too much support: "The Governing Council seems
concerned that a more aggressive tapering plan could harm financial
conditions, especially by letting the euro appreciate even more,” said Kristian Toedtmann, an economist at DekaBank in Frankfurt.
Meanwhile, the major sticking point among ECB governors appears to be
whether to commit to an end-date for QE. Draghi has expressed
confidence that the region’s economic recovery will eventually help him
and his peers to deliver on their mandate. Yet inflation was 1.5% in
September and ECB’s own forecast doesn’t see it returning to the goal of
below but close to 2% before the end of 2019.
“It seems that the hawks want a definitive end-date while the doves
want it open-ended,” Alan McQuaid, an economist at an economist at
Merrion Capital in Dublin. “I think we will get a compromise,
with the ECB saying that it intends to end its QE scheme in September
2018, but if things take a dramatic turn for the worse on the economic
or inflation front in the meantime, it will extend its scheme further
until things have stabilized.”
Which is why many model QE as lasting beyond the 9 month horizon, and running through the end of March 2019.
In terms of market consensus, the following Barclays chart visualizes
the most likely outcome, showing monthly QE declining by 50% in January
through October, when it tapers by another 50% until March 2019,
coupled with a modest increase in the ECB's deposit rate around the end
of 2018.
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