- Small upside inflation news is unlikely to prompt a significant re-assessment by the ECB of its inflation forecast,
- The ECB "remains committed" to continuing asset purchases beyond March 2017
- HSBC expects an extension to be announced at the 8th December meeting
Slight upside news for inflation, but still well below target
According to HSBC, we are not going to get a new forecast from the ECB on 20 October, but positive news for industrial production in Q3, the possibility of slightly looser fiscal policy in 2017 and a 5% rise in the EUR oil price imply slight upside news for inflation as the ECB prepares for its policy meeting.
For markets, the biggest news since the previous meeting was an ECB official quoted as saying that the "ECB might reduce purchases in steps of EUR10bn". Some investors are taking the comments very seriously and, on top of the disappointment that the ECB did not extend QE in September, 10-year bund yields have risen around 20bps from their September trough.
Fabio Balboni and Simon Wells believe this small upside inflation news is unlikely to prompt a significant re-assessment by the ECB of its inflation forecast, which is well below target (1.2% in 2017, and 1.6% in 2018). The minutes of the September meeting made clear that the ECB "remained committed" to continuing asset purchases beyond March 2017 and "until the Governing Council saw a sustained adjustment in the path of inflation consistent with its inflation aim". The sub-target inflation forecasts it made in September were conditional on market expectations of more (not less) monetary easing.
So in their view, it is too early for the ECB to start tapering its asset purchases.
Extend now, later or taper?
Once the technical constraints have been overcome, they continue to expect a six-month QE extension to be announced. Although an October extension might avoid a more heated debate in December as base effects push inflation up, more time may be needed for the ECB's committees to complete their technical work. Also, the higher yields rise, the less binding the yield floor becomes.
"We therefore expect an extension to be announced at the 8th December meeting. Based on the ECB's recent comments and inflation forecasts, we expect it to maintain the current purchase rate of EUR80bn per month. To do this, it may need to increase the issuance limit for bonds with Collective Action Clauses, but we also look at other options the ECB might have to explore. It is also possible that the ECB may start to signal its exit strategy from QE, once it thinks inflation is back on track." They conclude.