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15 Apr 2015
ECB QE taper a premature speculation - Rabobank
FXStreet (Bali) - Elwin de Groot, Senior Eurozone Strategist at Rabobank, notes that the prospects of the ECB being forced to halt asset purchases before the planned end-date is a premature speculation.
Key Quotes
"Although the ECB has just entered the second month of its PSPP (intended to run for 19 months), there has already been talk that it could be forced to halt its purchases well before the planned enddate. Well ahead of that, the thinking goes, it may have to change the modalities of its program or, alternatively, adjust other parameters of its monetary policy strategy."
"In our view, this speculation is premature. First of all because we think that the ECB will leave it up to the market to do its ‘corrective’ work. We believe that a deposit rate cut (one option to alleviate the perceived supply-demand imbalance) will not be very helpful at this stage. Secondly, although recent economic data have been encouraging, we believe they are not yet unequivocally supportive of the success of QE. Some of its benefits (i.e. currency weakness) risks being offset by slowing external demand. Inflation, meanwhile, has turned the corner but in our view doesn’t yet look to have moved sustainably higher. In this context, we would like to recall that the main rationale for QE was not to lower market rates per se but to raise medium-term growth and inflation expectations."
"As a final point we think it would be unwise for the ECB to move the goal posts so shortly after having started its PSPP. Certainly it would do no good for its credibility and it may even undermine its longer-term goal of rising medium-term inflation expectations. Recall that the ECB is not the only central bank engaged in easing monetary policy. Even the Fed appears to be divided on when to start its rate liftoff. At this stage, we reckon the ECB cannot afford to risk setting off a sharp reversal in the euro."
Key Quotes
"Although the ECB has just entered the second month of its PSPP (intended to run for 19 months), there has already been talk that it could be forced to halt its purchases well before the planned enddate. Well ahead of that, the thinking goes, it may have to change the modalities of its program or, alternatively, adjust other parameters of its monetary policy strategy."
"In our view, this speculation is premature. First of all because we think that the ECB will leave it up to the market to do its ‘corrective’ work. We believe that a deposit rate cut (one option to alleviate the perceived supply-demand imbalance) will not be very helpful at this stage. Secondly, although recent economic data have been encouraging, we believe they are not yet unequivocally supportive of the success of QE. Some of its benefits (i.e. currency weakness) risks being offset by slowing external demand. Inflation, meanwhile, has turned the corner but in our view doesn’t yet look to have moved sustainably higher. In this context, we would like to recall that the main rationale for QE was not to lower market rates per se but to raise medium-term growth and inflation expectations."
"As a final point we think it would be unwise for the ECB to move the goal posts so shortly after having started its PSPP. Certainly it would do no good for its credibility and it may even undermine its longer-term goal of rising medium-term inflation expectations. Recall that the ECB is not the only central bank engaged in easing monetary policy. Even the Fed appears to be divided on when to start its rate liftoff. At this stage, we reckon the ECB cannot afford to risk setting off a sharp reversal in the euro."