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Quantitative Easing, what`s next?

06744 CC Trader Talk V2

The next ECB meeting to be held in Latvia tomorrow, 14th June, is expected to be the opportunity to discuss the winding down of the quantitative easing programme launched by Mario Draghi in March 2015 as an emergency stimulus to the economy, which by September 2018 will total €2.6 trillion of purchases. The assets purchases are currently scheduled to continue until at least September 2018 at a pace of €30 billion a month (compared to €60 billion a month until December 2017). The ECB has signalled that purchases won’t end abruptly.

Peter Praet, ECB’s Chief Economist and member of the Governing Council, said the Council will start debating the gradual exit from the asset-purchase programme during the meeting in Latvia. However, although the Latvia meeting could mark a turning point in terms of discussions, Mario Draghi might use the press conference to signal that the announcement of a change in policy could come next month after the next ECB meeting to be held on July 26.

The change in policy would come after the pace of growth has slowed from last year’s decade high, but the annual inflation has spiked in May to 1.9%, close to the 2% target of the ECB, up from the 1.2% registered in April 2018. This was mainly due to the increase in energy prices, with the Brent oil reaching $80 per barrel in May.

During the meeting the new economic forecasts (prepared on a quarterly basis) will be presented, with respect to which a downward revision of GDP (gross domestic product) growth is likely as well as an upward revision for inflation, which would help the ECB explain its change in guidance.

According to a survey conducted by Bloomberg, overall economists expect the monthly bond purchases to be cut to zero by Q4 2018, after a tapering of the programme in the last three months of 2018; a hike in the deposit rate from -0.4% to -0.25% by Q2 2019; and an increase in the refinancing rate in the second half of 2019. Proceeds from maturing bonds are expected to be reinvested for another two to three years.

The main concerns highlighted by economists are the political uncertainty in Italy and the trade conflict, exacerbated by the U.S. President Donald Trump’s administration imposing steel and aluminium tariffs on the EU, Canada and Mexico on May 31.

Conversely, the political situation in Italy seems to have calmed down after the recent political instability affected financial markets in the past weeks and caused a four-year high spike in Italian public borrowing costs and a drop in bank stocks’ prices. In the auction held at the end of May, the 6 months notes were allocated at a rate of 1.213% compared to -0.421% as at end of April, 2-year notes experienced an increase from -0.275% to 0.35% whilst 10 year Btp were placed at a yield of 1.28%, up from 0.47%. The spread between the Btp and the Bund is now down to 231bps after the spike to 303bps registered on May 29, showing a market’s perception of the political risk relatively contained and unlikely to affect monetary policy.

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