ECB: QE extended at a slower pace, but with an effective easing - Westpac

Tim Riddell, Research Analyst at Westpac, notes that the ECB has surprised with not only an extending of its QE, though at a lower rate the total projected APP is EUR780bn in 2017, but also with an effective easing by relaxing restrictions on eligible issues.

Key Quotes

• “2017 target for APP is EUR780bn to take total QE to EUR2.4trn
• Biggest change is for eligible securities to include assets yielding below deposit rate – an effective further easing. This also relieves the pressure of self-imposed restriction on the asset pool.
• Other core rates left unchanged (refinancing rate 0.0%, marginal lending at 0.25%, deposit -0.40%)
• The statement provides a lot of flexibility and plenty of room to manoeuvre and takes away a lot of the self-imposed restrictions previously in place.
• The statement does outline that deflationary pressures are much reduced and this was overtly stated by Draghi. The ECB’s Governing Council view the projections below as broadly unchanged. The inflation profile is seen as driven by base effects rather than anything more material.
• The risks to growth are to the downside and there is an implicit dovish bias.
• The key profile from the December Quarterly Macroeconomic Projections is that growth changes are minimal with the addition of a mere 1.6% for 2019 as the forecast range extends. The inflation profile is raised but on energy base effects and not a core rise.
• This is a clear easing and extending of policy and though the APP amount was lowered on a monthly basis it actually a greater amount of QE that is now projected during 2017 and the Governing Council made it clear that there was “no discussion of tapering” and the policy remains open ended.
• Although the wording provides a sense of symmetry, the bias of the statement and the effective easing by allowing sub deposit rate yielding assets to be eligible also reduces repo concerns.”

“FX Perspective

• This extending and effective easing of policy, together with greater flexibility, should, at a minimum, have placed a cap on any further EUR gains into the FOMC next week.
• In a broader sense, this effective and extended easing may make EUR a funding currency of choice and so puts EUR-crosses in focus should the consolidation in USD persist. On that basis, EUR/AUD, EUR/CAD and especially EUR/NZD will be ideal shorts into any interim rebounds.”