Subdued inflation could postpone ECB’s QE tapering:ECB sent no signals on QE reduction,calibrations

As broadly expected, the ECB stood pat at the September meeting, and no formal announcements were made concerning the decisions on the QE beyond the end of this year. Also, it is not sure whether these decisions could be made and announced in October. According to Draghi, the bulk of decisions are expected at the next meeting, unless expected risks show up.

    Moreover, the ECB did not talk about the scarcity of eligible debt, but showed confidence that the central bank will be able to cope with such issue and exploit all the flexibility of the asset purchase program. Among all of the “not for sure” things, one thing is clear: the ECB will follow the US model that the present interest rates will be kept well beyond the asset purchases program.

    Obviously, the sluggish inflation remains to be the biggest concern. Despite the pick-up of the headline HICP in August, the medium projection of inflation was dampened by the recent euro appreciation, which was revised down from 1.3% YoY to 1.2% YoY for 2018, and from 1.6% YoY to 1.5% YoY for 2019. Moreover, there still exist notable slacks in job market despite the falling unemployment rate, which has depressed the wage growth and will hinder the development in inflation. According to the ECB’s inflation projection, significant improvement of inflation will not show up until June 2018.

    Based on the sluggish inflation outlook, we maintain our previous view that the ECB could announce to extend the current asset purchase program into 1H18, if it does not see convincing signals on improvements of inflation by its October meeting.

    Euro appreciated further with the EURUSD rate increased to above 1.2, on Draghi’s comment that the exchange rate is not a target of the central bank. However, what the ECB has made clearer is that if inflation remains well below ECB’s target, the current asset purchase program will probably need to continue even beyond the end of this year. Such stance bolstered bond and equity prices: bond yields fell and European equities stayed in positive territory.