ECB leaves door wide open for more QE

The ECB in its regular monetary policy meeting kept policy rates unchanged but decided to modify an important parameter in the asset purchase programme. Specifically, the GC increased the issue share limit from 25% to 33% (subject to case-by-case verification that this would not create a case of blocking minority power). While clearly stated that this is aimed at a smooth implementation of the current asset purchase programme, this decision is a signal that additional QE measures could be deployed to lean against a revised downward inflation outlook (eg, expansion of QE beyond September 2016). ECB President Draghi insisted on the willingness, readiness and ability to do more if needed. He also re-iterated that the QE programme provides sufficient flexibility should the ECB decide to expand the size, composition or duration. President Draghi mentioned that there was no discussion about a potential deposit rate cut.

"In light of the weak inflation outlook and ECB's downward revisions, we retain our call that the ECB will need to ease monetary policy further before year-end, most likely by extending its QE programme Although we believe a cut to the rate of the deposit facility would probably be more efficient in weakening the euro, we draw from today's press conference and the absence of discussion by the Governing Council (GC) that a deposit rate cut remains unlikely', says Barclays

The ECB revised downwards both growth and inflation projections for 2015-17 in its September quarterly macroeconomic outlook update. Growth was marked down by 0.1% this year and by 0.2% both in 2016 and 2017 - to 1.4% for 2015, 1.7% for 2016 and 1.8% for 2017. Inflation was revised materially downwards to 0.1% this year, 1.1% in 2016 and 1.7% in 2017. The revisions had to do with the weaker external environment (weak EM outlook and lower energy prices). Moreover, the GC sees inflation risks to the downside, which is very unusual - risks on inflation are usually deemed by the ECB as "balanced".

President Draghi discussed that inflation will remain very low in near term. There may be a slight increase in towards the end of the year on account of base effects (oil prices fell at end-2014). However, he expects inflation over the medium term to be supported by the economic recovery and euro weakness. On the recent market volatility and financial market conditions, President Draghi stated that the ECB will need to monitor these developments further before the GC can decide whether this will have a permanent effect on inflation and merit action.

Finally, in response to a question about a possible reinstatement of a waiver that would enable the Eurosystem to buy GGBs under QE, President Draghi clearly stated that Greece would need to demonstrate strong programme execution and ownership, while debt sustainability needs to be ensured.