ECB: “no signs yet of a convincing upward trend in underlying inflation” - Rabobank

Analysts at Rabobank noted that today, the ECB announced an extension of its QE program until December 2017 while keeping interest rates unchanged.

Key Quotes:

"The key reason to extend policy was that the Governing Council sees “no signs yet of a convincing upward trend in underlying inflation”. The snag in today’s decision – as always – was in the details and, overall, we would argue today’s message had a slightly hawkish undertone.

This was certainly the case in the eyes of the bond markets. Although the Eurodollar actually fell by more than 2 big figures following a very short-lived spike right after the policy announcement, sovereign bond yields traded notably higher in the aftermath of the press conference (although the market gyrated quite a bit, suggesting that the market had quite some difficulty in assessing the overall impact of the ECB’s policy decisions); sovereign spreads generally widened, Italian and Portuguese bonds in particular.

The ‘hawkish undertone’ in the message was largely because the Governing Council has decided to adjust its monthly purchase amount down to EUR60bn starting from April. So one could argue that had the ECB chosen to continue purchasing EUR80bn until September 2017 (this was our base case and, as a matter of fact, the other option that had been on the table according to Mr. Draghi), the total amount of purchases until end-2017 would have been around EUR107bn higher (this assumes that they would have started a gradual taper starting from October next year). The figure below illustrates this point."