ECB tapers with a twist - AmpGFX

The ECB was expected by most people to extend the time-frame for its 80bn QE program by six months from Mar-17 to Sep-17 but instead, it announced that after Mar-17 it would lower the purchase amount to 60bn, but extend it by nine months to Dec-16 as noted by the Greg Gibbs, Director at Amplifying Global FX Capital.

Key Quotes

“So a kind of taper. The ECB maintained the statement that the policy will be maintained “beyond [Dec-17], if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim.”

“In a dovish concession to the hawkish taper it said, “If, in the meantime, the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment of the path of inflation, the Governing Council intends to increase the program in terms of size and/or duration. The net purchases will be made alongside reinvestments of the principal payments from maturing securities purchased under the APP.”

“So this adds a bias to increasing the QE if required and to reinvest maturities.”

“Draghi also announced that it was decreasing the minimum maturity of eligible securities in the QE program from two-year to one-year from Jan-17. Furthermore, the ECB removed the minimum yield at which QE purchases are allowed – they may now be “permitted to the extent necessary” at a yield below the ECB’s Deposit facility [-0.40%].”

“This is a kind of policy twist since the minimum yield removal effects mainly short term securities, and now they can buy shorter-term securities, which implies fewer purchases of longer-term securities.”

“This element has been a master-stroke by the ECB.  It has tended to weaken the EUR, easing monetary conditions, but steepen the yield curve, taking the foot off the throat of banks, and boosting bank share prices.”

“Initially, the EUR rallied on the announcement of a taper in the QE amount, but then fell as the market absorbed the twist with some modest downward pressure on short-term yields.”