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ECB cautiously tapering, monetary conditions to remain accommodative for the next couple of years

Silvia Dall'Angelo, Senior Economist, Hermes Investment Management, reacts to today’s European Central Bank (ECB) decision:

“The ECB announced a reduction of the monthly pace of its QE purchasing starting from January next year, officially embarking on the so-called tapering process. The monthly clip of purchases will be reduced to €30bn (half the current pace) over the first nine months of 2018, which is in line with the expectations in the market going into the October meeting. While the ECB retained the flexibility to provide further extensions going forward, this move is likely to mark the closing stage of the ECB QE programme, the so-called APP (Asset Purchase Programme), launched in early 2015.

“Even with tapering, the overall monetary policy setting will remain highly accommodative over the next couple of years. After all, tapering still implies that the ECB balance sheet will continue to grow over 2018, only at a slower pace. The APP is now poised to increase from around €2.2trn currently to almost €2.6trn by September 2018 (around 23% of current GDP). Beyond then, the reinvestment policy of maturing bonds (which was confirmed for an “extended period” and “for as long as necessary”) will make sure that the ECB balance sheet will remain sizeable for long, while the flexibility embedded in the APP means purchases can be stepped up should adverse circumstances materialise.

“As for policy rates, the forward guidance stating that the key ECB rates will remain at their present levels “well past the horizon” of QE was automatically strengthened by the nine-month QE extension. Reading between the lines, that probably suggests the first rate hike will be delivered around mid-2019 at the earliest.

“Significant improvements in economic conditions in the euro-zone over the last year or so have given the ECB the opportunity to start to dial down one of its most controversial and unconventional policies. This is a welcome development as it goes in the direction of a lighter central banks’ presence, lessening distortions in financial markets. Yet, the still anaemic inflation picture remains a challenge. Unfortunately, it is unclear whether the ECB, or any other central bank around the world, have the right framework and tools to deal with it.”

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