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FxWirePro: ECB to continue corporate bonds purchase this year; QE unlikely to pause suddenly in September

The European Central Bank (ECB) is expected to continue its purchase of corporate bonds through this year and the quantitative easing (QE) program is unlikely to witness any sudden pause in September. GDP growth accelerated to a cyclical high, but core inflation has remained subdued, and well below the pace that would force markets and the ECB to contemplate anything but a slow removal of monetary stimulus.

The ECB, has, recently upgraded its 2018 forecast to 2.3 percent, but did not consider changing its core CPI outlook from a modest 1.1 percent. The main risk here is that inflation rebounds more strongly than expected. If GDP growth is sustained above 2.5 percent and core inflation jumps to 1.5 percent in the first half of 2018, the ECB and markets will have to reconsider their view on interest rates.

By contrast, a downside surprise to growth and inflation would be easy for the ECB to address. It could simply extend the duration of QE, and perhaps even increase its size. The ECB will continue to buy corporate bonds in 2018 and QE will not stop suddenly in September.

Meanwhile, we continue to foresee the corporate bond purchase program remaining stable at EUR7 billion-EUR 8 billion per month this year and that the ECB will unwind QE via a three-month taper, from September to December. The program, however, shall again be left open-ended, like the last time, via the commitment to restart it, if required.

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