ECB Under-Delivers?

Posted December 8, 2016 by rvillareal

Summary Highlights

•  Surprising many, but in line with DE thinking, the ECB said it will extend the bond purchase program of € 80 bln a month, when it ends next March, but also scale it back to € 60 bln a month for the period between April and December next year.   
• Initial market reaction implied this may be some sort of tapering.  This does not seem to the case as the ECB continued to state that the bond purchase program would continue to run until a pick-up in inflation is discernible: the updated ECB Inflation forecasts still see an undershoot even as far away as 2019.  However, the fact the Council deliberately chose an option of scaled back monthly purchases, it does seem as if the ECB is trying to flag that markets should not expected the bond purchase program to be anything like timeless. 
• Given that the Eurozone economy is growing well above trend (as fast as the US in GDP terms), with well above-par business and survey data that hint that official growth data may be understating activity yet again, the question is whether the ECB should be so willing to do more once the current bond program ends next March.
• Perhaps, two key themes that the ECB should be more willing to acknowledge but may be unwilling to do so at the current juncture. Firstly, price pressures are emerging, both from the demand and the supply side. Secondly, the current backdrop clearly sees robust consumer and business survey data.