Rabobank on yesterday's ECB sources piece

While much detail is lacking, the report by Reuters lends some support to Rabo’s view that the ECB will opt for a flexible "decision by meeting" approach, whereby it emphasizes the symmetric nature of the adjustment (i.e. purchases can also be raised again) and where the choice of the first adjustment gives some idea of the size of future adjustments. The alternative approach (say, a reduction to 20 or 30bn a month but committed to last until a certain end date) would be less flexible. This gives us two favoured scenarios, with the first being our base case. Both scenarios involve some details on tapering being given at the October meeting but with the size of the first reduction not actually being announced until the December meeting (note that both options result in a broadly similar cumulative volume of purchases):

i) EUR 20bn reduction at the December meeting (but with the reduction in purchases actually kicking in at the start of January), EUR 20bn at the 8 March meeting and EUR 20bn at the 14 June meeting. This option also means that each cut will be associated with a fresh set of the ECB’s economic projections.
ii) EUR 15bn reduction at the December meeting (but with the reduction in purchases kicking in at the start of January), EUR 15bn at the March meeting (the meeting on the 25 January is simply too soon), EUR 15bn at the 26 April meeting and EUR 15bn at the June meeting.

The least likely option would be a committed phase-out with a set end date (i.e., "we will be done by xx-xx-xx"). This would obviously be preferred by the hawks (who already grudgingly agreed to extend QE at December 2016, but probably with the condition that it would be the last extension). We believe that our base case of gradual and flexible adjustments would be more palatable to these hawks than another commitment to extend for the umpteenth time (even if this would be at a slower pace).

Admittedly, there is a risk in our two favoured approaches that once the second adjustment comes (say from 45bn to 30bn in March), the market will simply extrapolate this timing and infer that the program will be phased out completely by September 2018 at the latest. If, along the way, the market expectations lead to unwarranted tightening, the ECB does though still have the option of switching to a longer period of steady purchases.

20 Sep 2017 - 12:31- Fixed IncomeEconomic Commentary- Source: Rabobank

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