- European Central back expected to extend QE to 2019, according to Societe Generale.
- The French multinational bank says extension to be announced in September to start in January.
- Tapering will maintain gradual to give some room for manoeuvre.
The European Central Bank could be expected to continue its bond-buying program known as quantitative easing (QE) into 2019 despite announcing at its most recent policy meeting that the region's growth prospects now look "broadly balanced", Societe Generale has suggested.
The central bank set a dovish tone in its analysis of Europe's outlook when it met last Thursday to make its latest interest rate decision but the likelihood of it announcing an extension to its QE asset purchasing program (APP) in the third quarter of this year looks increasingly likely, SocGen said in a research note Sunday.
The French multinational bank said it expects the ECB to extend the APP, which refers to the purchase of private and public sector securities to tackle lower inflation, by six months in September. This would begin at a monthly pace of 40 billion euros ($44.9 billion) in January and tapering by 10 billion euros each quarter to end the program in the first quarter of 2019.
The ECB's president Mario Draghi said on Thursday that it would be willing to extend its QE strategy, both in duration and budget, if required. The bank opted to hold interest rates at 0.0 percent and downgrade its inflation forecasts despite revising up its growth outlook. The euro sunk in the wake of the decision, falling to $1.1207 against the greenback. By midday Monday it the euro had edged back to around $1.1220 levels.
"The overall dovish tone and a weak inflation outlook suggest that we are far from a policy normalisation debate, and we thus conclude that the next reduction in the monthly asset purchases will only come at the start of next year," SocGen said in a press release.
The ECB said it now anticipates inflation levels of 1.5 percent in 2017, 1.3 percent in 2018 and 1.6 percent in 2019. This is down from the forecasts released in March, which saw inflation reaching 1.7 percent in 2017, 1.6 percent in 2018 and 1.7 percent in 2019. This remains below its inflation target of below but close to 2 percent.
"Our forecast is that a cocktail of falling inflation and low core inflation is set to continue in 2017 and 2018, albeit with some modest pick-up on compensation."
SocGen added that it expects the ECB to be gradual in its tapering approach and suggests that new asset classes, such as equities, may have to be tapped to provide it with more room for manoeuvre in the event of adverse shocks to the European economy.
The central bank's announcement lacked any reference to its policy measures in 2018.