The stance at the latest ECB meeting was surprisingly dovish and according to Draghi, the ECB is open to a whole menu of monetary policy instruments. We now expect the ECB to cut the deposit rate and extend and expand its monthly QE purchases.
Such an announcement should have a positive market impact, especially as we expect the deposit rate cut to be accompanied by a strengthening of the ECB's forward guidance. This should lead the market to price in some probability of further rate cuts immediately after the first has been delivered.
Our expectation of higher monthly QE purchases is a change to our previous forecast and reflects our view that the ECB aims to accelerate the impact of the additional easing as it did when announcing the QE programme in January.
Specifically, we expect the ECB to extend the QE purchases by three months to December 2016 and expand the monthly purchases to EUR75bn, which should bring the ECB's balance sheet up to around EUR3.6trn.
Increasing the scope of the QE programme could imply the issue cap becomes an issue even for big sovereigns towards the end of 2016 but this is a headache for 2016 and does not prevent the ECB increasing purchases in December.
We expect the expanded monthly purchases to include corporate bonds in the QE universe. This should follow, as the ECB has stated this would be the most appropriate instrument for achieving additional monetary easing.
In this paper, we consider the potential easing related to the current QE programme but in an upcoming paper, we look at the arguments for the ECB cutting the deposit rate further while strengthening its forward guidance.
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