ECB: We forecast an extension of QE by six months in September - BNP

Thibault Mercier. Economist BNP Paribas explains that the European Central Bank could announced changes to the monetary policy at the September meeting. They forecast an extension of the asset purchase program.

Key Quotes:

“Without going into detail, M. Draghi said the central bank had shown flexibility so far in meeting its monthly purchasing targets.”

“Announcements of monetary policy changes are likely to take place in September, when the ECB presents its updated macroeconomic projections until 2018. In the meantime, a series of economic data and survey covering the summer months will provide a more precise idea of the first repercussions the UK “leave” vote will have on the eurozone economy.”

“As to inflation, M. Draghi pointed out that, unlike market expectations, surveys of professional forecasts do not show any material signs of a downturn in inflation expectations due to Brexit so far. Nevertheless, the expected downward revisions of growth forecasts are bound to have an impact on prices dynamics.”

“Although headline inflation should automatically rise as of year-end 2016 due to the base effects of energy prices, core inflation (excluding energy and food items), the most pertinent measure from a medium-term perspective, could be revised downwards. Under this scenario, the central bank would probably announce stronger monetary support.”

"Our forecast is an extension by six months of the asset purchases programme, which would run through September 2017 at the earliest.”

“As a radical modification of the current distribution key seems unlikely, we think the ECB will be capable of being flexible again in the future, resorting to more substitute purchases (of supranational bonds) in jurisdictions facing a shortage of eligible sovereign bonds, and to fewer such purchases in countries with no scarcity issue.”