- 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.
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