The ECB’s next steps are critical for the path of global bond yields. Our strategists highlight 5 possible paths the ECB’s policy could take.
- The ECB ends their QE program in March 2017, as currently planned;
- The ECB extends QE for six months to September 2017, at the current pace of €80bn in bond buying per month;
- The ECB extends QE program for twelve months to March 2018, at a pace of €80bn per month;
- The ECB extends QE to September 2017, but reduces the pace of purchases to €60bn per month;
- The ECB extends QE to March 2018, but cuts to €60bn per month.
The bottom panel shows that the growth rate of the ECB’s monetary base will decelerate sharply in 2017 & 2018 if the ECB does end the QE program as scheduled next March. Extending the program, however, does push out the rapid deceleration phase for monetary base into 2018. This is of critical importance for the Euro Area bond market, as both the outright level and term premium component of bond yields have been broadly correlated with the growth rate of the monetary base.
Bottom Line: In order to avoid a taper tantrum the ECB must extend its QE program by signaling to the markets that the ECB wishes to maintain low interest rates for longer. The next Insight looks into how the ECB can extend its QE program.