ECB: Asset purchase program will likely be extended? - BBH

There can be no reasonable doubt that Draghi and an overwhelming majority at the ECB believe that inflation has still not reached a self-sustaining path toward the target and therefore, the asset purchase program will likely be extended, points out the research team at BBH.  

Key Quotes

“The downside risks to growth (recession) and prices (deflation) have been markedly reduced, and this allows for a reduced pace of purchases.”

“Reports before the weekend that the ECB would vote in October on stopping asset purchases strikes us a wide of the mark.  Leaving aside the significance of the vote, the ECB has liked to announce policy changes with the cover of new staff forecasts.  These will be available in September.”

“Just as importantly, the claim seems to misunderstand the decision-making process.  Given the widely agreed upon recognition of the need to taper with than a hard stop, the idea that the ECB would decide to stop purchases is not very realistic.  Moreover, there is no need to decide when to stop purchases.  Instead, the two pressing issues are the amount to purchase and for how long.”

“When we tried gaming it out, we suggest a 50% reduction to 30 bln euro a month for an added six months could produce a large consensus.  The 50% reduction would appeal to the creditors as it is a bigger step that last year.  It would also allow a cut of the same euro amount (30 bln) to allow a full stop at mid-year if desired.  The creditors may push for a three-month extension, and it is possible that it carries the day, but in terms of communication and managing expectations, we suspect the six-month extension has more to recommend itself.”