ECB: What’s next plausible step? - ING

Carsten Brzeski, Chief Economist at ING, suggests that there are three scenarios for the ECB’s next plausible step and the first amongst them is the abrupt stop of QE in September.

Key Quotes

“This scenario would follow the initial logic of QE as a deflation-fighting tool. With the ongoing recovery, closing output gaps and headline inflation at least above 1%, no single European central banker can still seriously talk about deflation. Hence, an end to QE would be the logical consequence. This scenario, however, would not only contradict Mario Draghi’s own words that he did not expect an abrupt end of QE, but it would also bring forward expectations about a first rate hike. This would be to an even earlier date than the mid-2019 recently advocated by Weidmann and other hawks. Therefore, this scenario is extremely unlikely, though not completely impossible.”

“Another extension with open end

This scenario currently seems to be the mainstream ECB call. It reflects the view that there seems to be a broad consensus within the ECB that QE should be ended but that diverging views only exist on the timing and details of this end. Another “lower for longer”, reducing the monthly QE purchases from currently €30bn to €15bn at least until the end of the year would be an almost organic next step in the ECB’s gradual end to QE. It would also leave the door open to another extension beyond 2018 in case of an unexpected slowdown of the Eurozone economy or new downward revisions of the inflation forecasts. At the same time, however, it could be too much for the ECB hawks who are clearly advocating a clear end date for QE.”

“Much lower for much longer but with an end date

Another possible compromise between hawks and doves could be a so-called “much lower for much longer”, ie, an extension of QE for another six months but then at a very low level of about €5bn. This extension could then be combined with an end date. This scenario would become more likely in case the soft patch of the first two months of the year was to continue and if the June staff projections for inflation up to 2020 remain unchanged or are even revised downwards.”