The ECB in 2018 will officially embark on QE tapering. Monthly purchases will be halved to €30bn over the first nine months of 2018. That is likely the final stage of the so-called APP.
The improved economic background provides a strong justification for ECB tapering. However, the approach will be cautious, given inflation is still undershooting the ECB’s target.
Tapering means that the ECB will continue to provide stimulus, only at a slower pace. Hence, unless markets interpret it as paving the way to a more aggressive normalisation (unlikely), the ECB stance will continue to exert downward pressures on bond yields, though with a lower intensity.
A model for European rates based on a set of economic and financial variables suggests that peripheral rates are more sensitive to bond purchasing than core rates. As purchases are reduced, the focus will shift back onto fundamentals.
The impact on European rates (and European financial assets in general) from ECB tapering is likely to be limited next year, which supports our ‘new normal’ view of low-for-longer global rates.