ECB: Dovish Taper or Hawkish Ease?

The ECB announced it would extend its asset purchases from April
through December next year, but at a modestly slower pace of 60 bln
euros rather than 80 bln euros. 

We had been expected a six-month extension but without tapering.  This would have added 480 bln euros and instead what the ECB will buy is 540 bln euros.  The ECB will also expand the range of maturities it buys, and will allow the purchases of instruments yielding less than the minus 40 bp deposit rate.   

end date remains soft in the sense that asset purchases will continue
until the Governing Council sees substantial adjustment in inflation
toward the central bank’s target.
The staff forecasts warn of risks
of a further extension of the bond buying.  In its new forecasts that go
out until 2019, the staff does not see inflation above 1.7%.  In fact.
forecasts  2017 inflation at 1.3% from September’s 1.2%.  Inflation in
2018 is now expected to be 1.5% instead of 1.6%.   Draghi was clear on
this point:  The 2019 staff forecast “isn’t really meeting the goal.”

The staff made a minor adjustment to its GDP forecasts. 
It took next year’s estimate to 1.7% from 1.6% and kept 2018 at 1.6%
and introduced its 2019 GDP forecast at 1.6%.  That is probably very
close to what can be regarded as trend growth.  In comparison, US trend
growth is estimated by the Fed at 1.8%.  The BOJ estimates trend
Japanese growth nearer 0.2%.  

There are downside
risks associated with the forecasts, but Draghi acknowledges that
deflation pressures are “largely disappeared”. 
This seems to be largely because of the rise in energy prices.  Core inflation has been remarkably steady in the trough.  

Draghi was clear in the press conference. 
There was a “very broad”  consensus to extend the purchases, and,
importantly, that tapering was not discussed.  The spin Draghi wants the
market to take away is the that the ECB will have a sustained presence
on the markets.  

The euro initially spiked to
$1.0875 as stops were triggered and the knee-jerk market focused on the
60 bln euros of purchases rather than 80 bln.
  However, the euro was
sold off quickly and fell to $1.0640 during the press conference before
stabilizing.  A bounce toward $1.0730 may be sold.  European long-end
bonds yields jumped higher and appears to be the main force lifting US
yields.  However, at the shorter-end of the curve, European yields
including Italy are lower.  The US premium over Germany, which we think
is helpful in understanding euro movement, is up nearly 8 bp on the
day.  At 184 bp it is at a new five day high.  The multi-year peak was
seen last week near 188 bp (on a closing basis). 


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