ECB: We believe it will extend the QE program either in Oct or Sep -  Danske

According to analysts from Danske Bank, the European Central Bank will expand its purchase program at the meeting either in October or December.

Key Quotes:

“Ahead of the meeting, a lot of focus had been on whether the ECB would extend QE purchases beyond March 2017 but, in line with our expectation, the ECB kept the purchase horizon unchanged. According to the ECB, QE purchases ‘are intended to run until the end of March 2017, or beyond, if necessary, and in any case until it sees a sustained adjustment in the path of inflation consistent with its inflation aim’. Mario Draghi’s main message was that ‘the Governing Council tasked the relevant committees to evaluate the options that ensure a smooth implementation of our purchase programme’ with the committees having ‘full mandate’ to redesign QE. It is unclear whether the ECB is looking to include other assets in the QE universe or is considering adjusting the self imposed QE restrictions.”

“However, during the Q&A, Draghi said low interest rates have restricted the QE asset universe, acknowledging for the first time the German bond scarcity. Ahead we expect focus to be on ECB members’ comments on potential changes to the QE restrictions or universe.”

“Despite today’s decision to keep the QE purchase horizon unchanged, we believe the ECB will extend purchases by six months, at the meeting in either October or December. We expect this because of the lack of any upward trend in the underlying price pressure and the persistently low market-based inflation expectations. Related to this, we do not believe a sharp rise in inflation later this year would be enough for the ECB to end QE purchases, as, in our view, higher inflation would be driven mainly by the higher oil price.”

“Today’s price action clearly suggests that some were looking for a removal of the deposit floor causing a 3bp increase in Schatz. Also, the 5bp sell-off in the 30Y reflected that there had been some anticipation in the market that the issue limit of 33% would be lifted. EUR/USD is a bit higher at 1.1307 but we expect the recent high of 1.1366 to hold.”