UBS : Flash Macro Keys ECB: What should we expect next week?

Don’t hold your breath: ECB to announce QE extension only on 8 December…

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Our base-case scenario is that the ECB will extend its QE programme beyond March 2017, given subdued inflation and growth. Recent Eurozone data has been somewhat mixed, but more resilient than feared right after the UK referendum. On balance, we believe this gives the ECB scope to delay its decision on an extension of QE until 8 December. This could disappoint some market participants and will put pressure on Mr Draghi to calibrate his message carefully. Instead, we expect next week’s focus to be on the Eurozone’s economic performance since the UK referendum and on the new ECB staff macroeconomic projections for 2016-18. Consequently, we think big monetary policy decisions are unlikely on 8 September, although technical tweaks to the QE programme could well happen. We do not envisage further rate cuts.

Focus on new ECB staff macroeconomic forecasts

In its macro forecasts from June, the ECB projected GDP growth of 1.6% for this year and 1.7% for 2017 and 2018. In light of the UK referendum, we expect a downward revision to 1.5% for this year and 1.3-1.4% for 2017. The ECB’s inflation forecast – 1.3% for 2017 and 1.6% for 2018 – might also be revised downwards, although most likely only by a small amount.

Clock is ticking for technical adjustments to the QE programme

As we have argued previously, the ECB may soon – perhaps as soon as 8 September – have to adjust the technical rules of its QE programme if it wants to continue buying €80bn of assets until March 2017, or longer (Will the ECB run out of German bonds to buy soon?). We think increasing the issue limit on bonds not containing a collective action clause (CAC) and expanding the maturity range of purchases could be easily achieved. Scrapping the deposit rate floor and amending the rules on substitute purchases is also a possibility. However, we regard a deviation from the capital key allocation on purchases as unlikely. In the near term, we also see a low chance that the ECB would expand the range of assets to include bank bonds or cut the deposit rate unless – but this seems very unlikely, too – it is part of a more fundamental monetary policy decision.