David Zahn (pictured), head of European Fixed Income, Franklin Templeton Fixed Income Group, gives his view on yesterday’s ECB announcement.
As largely expected by the market, the European Central Bank has left key interests unchanged, and has extended the time horizon for its asset purchasing programme.
However, it has extended the programme by an initial nine months which goes beyond initial indications of six months, but will reduce the pace of purchases from April 2017 onwards down to €60 billion until end of December 2017.
We think this is supportive for the European bond markets longer term as it shows that the central bank will remain accommodative for an extended period of time. It is also worth noting that this newly announced plan still represents more than the market expectation of six months of continued QE at the current purchasing rate.
Critically, the central bank has also decided to change the parameters of its asset purchases programme, to give the required flexibility to keep the programme in continuation.
By removing the deposit floor of -0.4% on purchases and extending its purchase remit from 2-31 year maturities to 1-31 year maturities, we think that the central bank is making it easier to continue the QE with ease for an extended period of time.
This also suggests that the central bank is likely to want to buy more shorter duration bonds, meaning we will likely see the yield curve steepening, having a higher impact on yields for longer dated bonds.
Looking forward, our view is that growth in Europe will remain slow and steady – potentially around the 1-1.5% mark over the next year or so.
The ECB itself only forecasts 2019 inflation at 1.7 per cent. We think this means that the ECB feels that we are still somewhat far away from the 2% initial inflation target for 2019, so with that in mind, we would expect the central bank to remain accommodative for some time.