Six probable tapering/easing scenarios of ECB’s October monetary policy

European Central Bank’s (ECB) governing council will meet on October 26th to decide on the future of the current monetary easing. Here are six probable tapering/easing scenarios,

• Case 1: The central bank will extend the QE for another nine months but at a reduced pace of €30 billion. In that case, ECB will hit purchasing limit on German bonds in February 2019 and ECB is expected to hike rates for the first time in H1 2019.
   
• Case 2: ECB extends QE for another 12 months but at a much-reduced pace of €20 billion. In that case, ECB will hit purchasing limit on German bonds in October 2019 and ECB will hike in the third quarter of 2019. ECB communications have suggested that sufficient time (probably six months) will be allowed between QE end and rate hike.
   
• Case 3: The central bank winds up QE in the next six months but continues with €40 billion per month. In that case, ECB would hit the limit on German bonds without any changes in composition by September 2018. In such a case, a rate hike might come as early as the first quarter of 2019.
   
• Case 4: ECB might even announce a fixed amount of QE. For example, it might announce €250 billion extensions to the current QE program phased over 9 or 12 months. In such a case, German limit will not be hit until September 2019 if composition remains unchanged.
   
• Case 5: ECB might take up the gradual tapering route with €5 billion reductions per month beginning December and that will end the QE in December 2018 and the first rate hike can happen in H1 2019.
   
• Case 6: This is a less likely scenario, where ECB bundle asset purchase and reinvestment together to announce a gross purchase amount distributed over six, nine or twelve months.
   

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