ECB Preview: Setting the ground for the next QE extension
With the euro area inflation still weak and the full shock of the UK’s Brexit referendum outcome yet to come, the ECB is widely expected to announce an extension of its APP program at the 8 September meeting. While key policy rates and the size of the monthly purchases are expected to be kept unchanged, a 6 to 9 month extension of asset purchases to September 2017 seems to be on the cards, possibly accompanied by some modifications in QE technical modalities in order to tackle the bond scarcity problem. Meanwhile, the ECB will present its updated quarterly macro forecasts amid a modest continuing economic recovery. We do not expect any significant changes to the ECB’s June inflation projections of 0.2% for 2016, 1.3% for 2017 and 1.6% for 2018. Nevertheless, GDP growth projections could be revised downwards from the respective 1.7% June estimate for 2017 and 2018 on the back of a possible slowdown in countries with strong trade linkages with the UK.
Below we present some of the possible key ECB options in order for the QE to be effectively adjusted. Moreover, we analyze the potential market impact of each option.
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