ECB cites liquidity not reflation as key reason to cut down pace of purchase

In December the European Central Bank (ECB) announced that it would extend its asset purchase program until December but at a slower pace of €60 billion. At that time, it was speculated that the central bank is taking up precautionary measures facing a spark in inflation and increased commodity prices after Donald Trump secured a victory in the US election. Major selloffs in the bond market amid higher commodity prices became popularly known as Trumpflation trade. However, the released accounts of that meeting strongly suggest that the central bank trimmed the pace of purchase largely due to the concerns with regard to the liquidity in the bond market amid a scarcity of assets. The minutes said, “Maintaining the monthly pace of €80 billion in an environment of declining market liquidity could put increasing pressure on market yields.”        

This is for the very first time ECB formally accepted that availability of allowable assets as a key issue. This has been the reason, why the central bank changed its rule in December, which allows it to buy assets yielding lower than the deposit rate, which was kept steady at -0.4 percent.

We expect, the central bank to continue to cite the liquidity as an issue throughout 2017 and reduce its asset purchase pace further from €60 billion per month.