Will the euro react if (as expected), the ECB announces a timeline to reduce its asset purchase program on Thursday?

Oct 25 • Mind The Gap • 76 Views • No Comments

On Thursday October 26th, at 11:45 GMT, the Eurozone central bank, the ECB, will reveal its decision with regards to the single currency bloc’s interest rate. The current key borrowing rate is zero percent, with the deposit rate below zero, at -0.40%. These emergency rates are still a legacy of the recession the Eurozone found itself in shortly after the headwinds of the 2007/2008 global financial crises, the subsequent credit crunch and other issues, such as; the Greek debt crisis. The ECB engaged in an asset/bond purchase program in order to partly alleviate the lack of credit.

From March 2015 until March 2016, the average monthly pace of the asset purchasing was €60 billion. From April 2016 until March 2017 the average monthly pace of the asset purchases was €80 billion. The current rate is €60b a month, with an expectation that the ECB will announce a reduction (taper) to €40b, or €30b a month on Thursday, perhaps commencing in December, or more likely January 2018. The ECB maintains a remit to keep inflation CPI just below 2%, it’s currently at 1.5%.

Certain analysts believe the ECB needs to begin to taper now, as it can’t afford to push the APP beyond a €2.5 trillion ceiling, under its current rules and governance and with the total asset purchases on the ECB balance sheet forecast to reach circa €2.3 trillion by the end of 2017, the suggestion is that the ECB only has circa €200b more to give.

Focus will therefore be on the narrative concerning the timing of the APP reduction, as opposed to any immediate interest rate rise announcement, finer details of which will surely be revealed during Mario Draghi’s press conference, at 12:30 pm GMT. There is little expectation for a rate rise to be announced on Thursday, however, many economists believe that interest rate rises will begin early 2018, whilst the APP will ultimately end in 2018 after a period of tapering. Mario Draghi is expected to cover both issues; of interest rates and APP, during the press conference.

The euro will be under close scrutiny immediately after the rate decision (and the narrative accompanying the interest rate and current APP rate), right through to the press conference held forty five minutes later. During this window and shortly after the press conference we can expect increased volatility and movement in the euro currency pairs, particularly if there’s any shock to the overall consensus. The forecast from the economists polled by agencies, such as Reuters and Bloomberg, is for the key interest rate to remain unchanged at zero and the asset purchase program to remain unchanged, with forward guidance on both key issues, to indicate change beginning from early 2018.

KEY ECONOMIC METRICS FOR THE EURO ZONE

Interest rate 0.00%
APP rate €60b per month
Inflation rate (CPI) 1.5%
Growth 2.3% (GDP annual)
Unemployment rate 9.1%
Composite PMI 55.9
Retail sales YoY 1.2%
Government debt v GDP 89.2%

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