Group Economics
Daily Insight
Macro & Financial Markets Research Nick Kounis, Aline Schuiling & Kim Liu
ECB signals more QE
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3 September 2015
The ECB looks set to step up its QE programmes before long President Draghi announced a lower 2017 inflation forecast as well as downside risks More QE will probably take the form of higher monthly purchases
The exceedingly dovish Mr. Draghi
ECB reduces inflation forecasts
ECB President Mario Draghi struck a very dovish tone during
% yoy
Thursday’s press conference. He said recent that
2.0
1.8
developments pointed to a ‘weaker economic recovery and slower increase in inflation rates’. In addition, ‘downside risks’ had emerged for both growth and inflation. Given recent
1.7
1.5 1.5 1.1 1.0
volatility in financial and commodity markets, the Governing Council judged that it was ‘premature’ to draw conclusions for
0.5
ability to act’. Overall, we think this commentary is a strong
0.0 2015
signal that the ECB will step up its QE programmes before
2016 June 2015
long. Inflation forecast for 2017 downgraded
0.3 0.1
price stability. However, it emphasised its ‘willingness and
2017
September 2015
Source: ECB
President Draghi followed up the dovish commentary by announcing downgrades to the ECB’s growth and inflation
ECB will likely step up its monthly purchases
forecasts. Importantly this also included the inflation projection
Additional ECB QE is now our base case scenario (we
for 2017, which is currently seen as representing the medium
previously saw a 40% chance). We think that the central bank
term horizon crucial for policy decisions. At 1.7%, the new
will most likely do this by stepping up the pace of its monthly
medium term forecast is already arguably below the ECB’s
purchases. It will also likely need to increase the eligible
price stability goal.
universe of assets it will buy (see our note here for more on this). More QE will likely be announced before the end of this
Increasing downside risks
year.
Furthermore, developments since the inflation forecast was made in ‘oil prices and…exchange rates’, suggest it could be
ECB increases limit for purchases
downgraded further. The Governing Council also saw risks to
The central bank already announced a change in its existing
the economic outlook from ‘current developments’ in emerging
QE programme, that may help it expand it going forward. It
markets, which could affect global growth.
decided to increase the issue share limit from 25% to 33%, which will give it a little more flexibility in its purchases. More
Not quickly reversed
importantly, it opens the door for more changes.
Although, the ECB still felt it was too early to make a clear judgement on all this, Mr. Draghi said several times that it was
Markets rally, the euro declines
unlikely that the ‘recent challenges would be quickly reversed’.
The ECB’s remarks supported both equity and government
This suggests that the central bank feels that the problems in
bond markets. German 10y Bund yields were down by around
emerging markets will not go away in a hurry. As well as
5bp, while the euro Stoxx index was up by almost 3%.
getting a better grip on the recent market turmoil, the ECB’s
Meanwhile, the prospect of more QE also weighed on the
hesitation to act already at this meeting probably also reflected
euro, with EUR/USD declining to around the 1.11 level.
that it needs more time to decide exactly what to do.