Euro area QE is here for the long haul

With weak sentiment hitting the euro area in recent weeks, ECB President Draghi will face a tricky task of managing expectations. On the one hand, he will need to continue sending a dovish message of standing ready to act if needed, on the other hand, he does not have enough evidence of a sharp slowdown in activity and inflation to signal an imminent policy reaction. 

"While recent German data wobbles add to the uncertainty and downside risks, either VW or China are not expected to derail euro area growth in the short term. An extension of the QE and TLTRO programmes beyond September 2016 is expected, adding also a corporate bond purchase programme in the spring of next year", says Societe Generale. 

If a weaker inflation outlook emerges in the short term, accelerated asset purchases would be expected, rather than a deposit rate cut. In the medium term, prolonged QE could raise supply concerns, suggesting that the Governing Council may need to be careful with accelerating purchases. 

"In an IMF scenario of persistent lowflation in the euro area, any further shock could force the ECB to consider both the formulation of its target and new asset purchase classes, including equity", added Societe Generale.