ECB: A long, slow, disguised and clever taper – Deutsche Bank

According to the Analysts at Deutsche Bank, Mario Draghi was at pains to stress that the slowing in the pace of QE to EUR60bn per month this was not the announcement of tapering.

Key Quotes

“Draghi emphasized the longer-than-consensus 9-month extension of the QE programme and the commitment to more if necessary. Preserving the extraordinary degree of policy accommodative and lengthening the period of the ECB’s presence in the market was the overarching narrative the ECB wants to be taken from the announcements.”

“Our interpretation is that this is a long, slow, disguised and clever taper. There has been an underlying improvement in the macro picture and the size of QE has been adjusted because the deflation risks foreseen in March have subsided. But the recovery remains uncertain and the ECB needs to ensure a taper tantrum does not stub it out. Hence the longer QE and asymmetric commitment to doing more if necessary is valuable insurance.”

“The commitment to doing more is valuable insurance against a deterioration in financial conditions should, for example, this materialize in response to political events. Without the deceleration in purchases, Draghi might not have had the support to make this backstop commitment so clear in this week's meeting.”

“Assuming downside risks, political or otherwise, do not materialise, in September 2017 the ECB will face its next “extend or taper” decision. On the basis of the latest staff core inflation forecasts, our three core inflation rules to justify tapering will be satisfied at that point in time. Assuming the ECB’s above-consensus view on growth holds, the decision next September will be to either taper or make another step-wise adjustment to QE. The difference is just semantics. A long, slow tapering has begun.”

“We are more cautious on growth in 2017. Nevertheless, as the political calendar thins in H2’17, the outlook for growth into 2018 ought to be rising. A further reduction in QE – or tapering – is probable around end-2017.”