Summary:
All eyes turn to the European Central Bank this Thursday as the much-awaited tapering announcement will mark an end to a few months of speculation. The ECB is expected to announce a tapering of approximately 30 billion euro from its quantitative easing program. Currently, the ECB is purchased a total of 60 billion euro made up of both sovereign and corporate bonds.
In terms of the breakdown, the central bank is expected to cut back more on the corporate bonds first. While the markets may get what they were anticipating over the past few months, a lot of questions remain.
A taper of 30 billion euro will cut the current bond purchases by half to 30 billion euro and will see a reduction of nearly 50 billion euro since the ECB started its QE program in January 2015. The central bank had started its bond purchases at a pace of 80 billion euro.
For one, the newly proposed tapering scope will come into question. As widely expected, the ECB will implement its tapering starting January after previously committing to purchase bonds at the current pace until December.
For how long the next (and reduced) QE purchases will run for remains the big question. The ECB for its part is likely to err on the side of caution and maintain a dovish tone. The markets are currently anticipating that the new tapering will run for at least nine months with the ECB expected to end its QE program by end of 2018.
ECB’s inflation forecasts and forward guidance
