In October 2017, European Central Bank (ECB) President Mario Draghi announced plans to halve the ECB’s bond purchases to €30 billion for a period of nine months, effective January 2018. Although he did not confirm an end date for quantitative easing (QE), we expect it to conclude in September 2018 or shortly thereafter.
As the chart shows, the ECB has been purchasing bonds since March 2015, and its exit from QE will continue to be a major factor influencing markets – what happens from September 2018 will be critical. Will the ECB simply stop asset purchases, or slow the pace of purchases further? Markets will also focus on how long will it take between ending asset purchases and raising interest rates.
Several factors could encourage the ECB to end purchases in September 2018 and normalise policy rates faster than the market expects. These include improving economic growth or a desire to rebuild policy flexibility before the inevitable next recession occurs. With eurozone growth dependent on exports, especially Germany’s, the ECB will be keeping a close eye on the aging U.S. economic expansion.
The bottom line is that the ECB is on the QE exit path, and risks to our baseline above may be tilted towards a more hawkish outcome. Consequently, we expect to be slightly underweight European duration overall.