ECB: More needed before tapering - Danske

According to analysts from Danske Bank, is too early to discuss tapering from the European Central Bank and they expect the central bank to extend the purchase program by six months at the December Governing Council meeting. 

Key Quotes: 

“According to ECB officials the ECB is set to gradually wind down bond purchases once the QE programme ends. The ECB officials said an informal consensus has built among policymakers that QE will be tapered once the programme ends. The tapering may be in steps of EUR10bn per month, which would be similar to the Fed’s tapering. The news came as a surprise, as Draghi had previously said that the ECB had not discussed these topics, sending EUR/USD above 1.12 and 10Y German yields up 4bp. An extension of the QE purchases beyond the current end date of March 2017 by EUR80bn per month was not excluded according to the sources.”

“In our view, it is too early to discuss tapering and we expect the ECB to announce an extension of the QE purchases by six months at the meeting in December. Nevertheless, rising inflation could ignite speculation on whether ECB could do ‘less rather than more’.”

“Continuing the QE programme is needed, in our view, although inflation is set to rise sharply in coming months. The ECB expects inflation at 1.2% in Q1 17 but 0.7pp of the expected pick-up is driven by the oil price according to the ECB. The rise will thus not imply that the ECB has seen a ‘sustained adjustment in the path of inflation’ and hence end the QE programme. Instead, the ECB is likely to remain focused on low core inflation, which will not rise towards its historical average as the ECB expects next year.”