Societe Generale suggested that despite announcing at its most recent policy meeting that the region’s growth prospects now look “broadly balanced”, the European Central Bank could be expected to continue its bond-buying program known as quantitative easing (QE) into 2019.
SocGen said in a research note that the likelihood of it announcing an extension to its QE asset purchasing program (APP) in the third quarter of this year looks increasingly likely, even as the central bank set a dovish tone in its analysis of Europe’s outlook when it met last Thursday to make its latest interest rate decision.
The APP, which refers to the purchase of private and public sector securities to tackle lower inflation, is expected by the French multinational bank to be extended by another six months till September by the ECB. This would likely taper by 10 billion euros each quarter to end the program in the first quarter of 2019 and would most likely begin at a monthly pace of 40 billion euros ($44.9 billion) in January.
If required, it would be willing to extend its QE strategy, both in duration and budget, the ECB’s president Mario Draghi said on Thursday. Despite revising up its growth outlook, the bank opted to downgrade its inflation forecasts and hold interest rates at 0.0 percent.
Falling to $1.1207 against the greenback, the euro sunk in the wake of the decision. But the euro had edged back to around $1.1220 levels by midday Monday.
“The overall dovish tone and a weak inflation outlook suggest that we are far from a policy normalisation debate, and we thus conclude that the next reduction in the monthly asset purchases will only come at the start of next year,” SocGen said in a press release.
inflation levels of 1.6 percent in 2019, 1.3 percent in 2018 and 1.5 percent in 2017 are now expected by the ECB now, the central bank said. The forecasts released in March saw inflation reaching 1.7 percent in 2017, 1.6 percent in 2018 and 1.7 percent in 2019 and this estimation is down from those forecasts of March. This remains below its inflation target of below but close to 2 percent.
“Our forecast is that a cocktail of falling inflation and low core inflation is set to continue in 2017 and 2018, albeit with some modest pick-up on compensation.”
SocGen suggests that new asset classes, such as equities, may have to be tapped to provide it with more room for manoeuvre in the event of adverse shocks to the European economy and added that it expects the ECB to be gradual in its tapering approach.
Any reference to its policy measures in 2018 were lacking in the central bank’s announcement.
(Adapted from CNBC)
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