ECB Preview: QE to end in Q4 2018

Ahead of the forthcoming European Central Bank monetary policy meeting on Thursday 14 December, Carl Hammer, strategist at SEB  has commented on why he expects an end to QE in Q4 2018 and an ECB rate hike in 2019:

“At the European Central Bank’s (ECB) Governing Council meeting on 14th December, we expect details of its forthcoming quantitative easing (QE) re-calibration to be revealed, namely the distribution of the €30bn QE reduction across the four purchase programmes. Mario Draghi will also present new ECB projections, including for 2020 for the first time. These should reflect higher confidence in the outlook for GDP growth and, to a lesser extent, for inflation. In the press conference, we expect Draghi to once again tread carefully in order to prevent any hawkish market reaction. We expect the event to be largely market-neutral in rates and in FX space.

QE to end by September 2018?

“The key question for markets is whether QE will actually come to completion by the end of September 2018, if the ECB will smoothen its exit by means of a tapering phase, or whether policy makers will opt for another QE extension beyond September 2018. Since October, some ECB members and policy makers have suggested that the ECB could terminate the programme in September, without a further tapering phase. This course of action appears quite likely given the growing confidence of the Governing Council in the outlook for Euro-zone (EZ) growth, as witnessed not only by the sky-high levels of economic sentiment, but also by hard data such as GDP growth which has paced ahead with quarter-on-quarter rates of 0.6- 0.7% since Q4-2017.

 

“The policy outlook in late 2018 will ultimately be determined by the development of inflation in the second half of 2018. Our forecast is on a similar trajectory as that of the ECB with headline as well as core inflation expected to range between 0.9% and 1.6% through 2018/19. While both will exhibit heightened volatility due to base effects during the first half of 2018, they will embark on a stable, albeit shallow uptrend towards year end which will continue throughout 2019.

ECB rate hike in 2019

“A second key question for financial markets is the timing of the first ECB policy rate hike. As we see it, 2018 is shaping up as the “Year of QE-wind-down” and 2019 will consequently be the “Year of Mario Draghi’s First Rate Hike”. We expect the ECB to deliver a first Deposit Facility Rate hike in Q1 2019 by 15 bps to -0.25%. In a second step, the ECB could then shift all three policy rates up by 25 bps in June 2019. Further steps towards policy rates normalisation will be very gradual and even more so once the ECB embarks on balance sheet reduction sometime in 2020. As a general rule of thumb, we believe that all policy changes in 2018/19 will be announced as late as possible, in order to preserve the prevailing degree of monetary stimulus for as long as possible.

“In regards to the potential short-term market reaction in the FX space, EUR-USD is currently trading in the middle of its six-months trading range (1.16/1.20) range; it should display little if any upside reaction to the outcome of Thursday’s meeting. “

The full report can be found here.