ECB in implementation mode until after the summer – Danske Bank

Research Team at Danske Bank, suggests that the ECB is currently focused on the implementation of the rather aggressive easing package announced in March.

Key Quotes

“While waiting for these measures to be implemented the ECB expressed a patient view and argued that it was focused on the effects of the measures that had been taken. The patient stance followed although the market is not convinced that the ECB had eased sufficiently, as reflected in the market-based measure of medium-term inflation expectations (5y5y inflation swaps) which are back around an historically low level of 1.4%.

We expect the ECB will ease again and we look for a QE extension as the ECB in our view will not see inflation on a sustainable path towards 2%. As mentioned above, we look for a significant increase in inflation starting from June this year, but the main driver is energy prices and this effect is set to fade in Q217. In our view, it could be that the ECB will extend the purchases by six months to September 2017 and also announce a future tapering, where monthly QE purchases are gradually lowered by EUR20bn per month before ending in January 2018.

We do not believe that the ECB will cut policy rates again after it stepped out of the currency war at the March meeting. Back then the choice of easing showed that the ECB’s focus had shifted from the interest rate and currency channel to the bank-lending and credit channel. In our view, this was an important step, as the bank lending channel plays a crucial role in the transmission of the monetary policy in the euro area where bank lending intermediates around 80% of credit flows. Based on this, we expect the announced easing will support the recovery, but it is not a quick fix in terms of generating higher inflation and owing to this, we believe the ECB will have to extend its QE purchase beyond March 2017.”