Summary
We expect the ECB to extend its asset-purchase program, buying EUR 80 million in bonds each month, because of concerns about low inflation and political volatility. But Trump could be a wild card in the bank’s plans for continued accommodation.
At its 8 December meeting, the European Central Bank (ECB) will very likely extend its asset purchase programme (APP) by six to nine months. We also expect ECB President Mario Draghi to announce some technical adjustments to improve the supply of eligible bonds, such as revising issuer and issue share limits beyond 50 per cent. This will enable the ECB to access even more bonds and maintain its average monthly purchase rate of EUR 80 million.
The ECB will maintain its accommodative stance for two reasons:
- First, for the past two to three weeks, ECB communications have consistently focused on disappointing inflation figures – especially core inflation, which, in November, came out at 0.8 per cent year over year. This is both too low and too far from the 2 per cent inflation target set by the ECB to achieve its sole stated mission of price stability.
- Second, today’s volatile political environment shows no signs of calming down. Despite Austria’s decision not to elect a far-right candidate, Italy’s “no” vote sets the stage for continued instability in the euro zone. Looking ahead, both the Netherlands and France go to the polls in the first half of 2017, with each nation’s self-styled “anti-establishment” candidate currently enjoying high levels of popularity.
As to the supply, it is difficult to anticipate whether the current Trump-inspired rise in yields will be sustainable. Should the US president-elect’s economic policy disappoint the markets, the consequent fall in US yields will have a direct downward pressure on euro-zone yields. Currently, the ECB can only buy bonds with yields above its deposit rate of -0.4 per cent and the bank cannot take the risk of a shrinking pool from which to buy.
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Franck Dixmier
Summary
Our Capital Markets and Thematic Research team says geopolitics, monetary policy and the global economy are the three factors that will exert the most influence on investments in 2017, but it could be a volatile mix.