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ECB Preview: Recalibrating, Not Tapering – But Hawks Will Squawk

The ECB meeting on Thursday next week is set to focus on the PEPP re-calibration and
the inflation outlook. With stable and benign financial market conditions, record low
real rates and an economy that is recovering well in Q3 as well, the conditions are met
to slow the PEPP purchase pace…

… but ECB will not call this tapering. We expect ECB and president Lagarde to stress
that the re-calibration is not be compared to tapering, but ECB responding to the
changes in financing and economics conditions by aligning its PEPP volume. We
expect PEPP purchases to be similar to the January/February level of EUR60bn/month,
down from the current c. EUR80bn/month. That said, without an external shock to the
economy we find it hard to argue to for a higher PEPP volume in the current ECB
growth and inflation narrative.

Diverging views in the Governing council have already started to show in recent weeks.
The July minutes showed varying views about how to align the communication to the
new strategy. We expect further discussions about de-linking the rates forward
guidance and APP to play a role at upcoming meetings, but foresee no changes to the
guidance yet.

At the December meeting, we expect a bigger QE calibration ‘battle’ to take place.
Lane’s interview last week said that APP volume cannot be seen in isolation of net
supply, hence scaling up of APP cannot be ruled out at this stage. We also expect
liquidity operations will be extended at the December meeting.

That also means that from a market perspective, ECB will attempt to keep this meeting
as uneventful as possible, yet the fall will be very interesting as hawks start to squawk
more loudly than previous. We continue to expect Bunds to stay in a -60bp to -20bp
range for the foreseeable future.

Full report in PDF.