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Some thoughts on this 'upper limit' story to ECB QE of just over €2.5tn. QE is finite indeed, and the numbers look plausible. (1/n)
With total asset purchases expected to reach €2280bn by Dec-17, this would leave the ECB with about €220-300bn to buy (total APP). (2/n)
But, QE binding end-date depends on composition, i.e. the share of (German) PSPP. No more than €55-60bn of Bunds are left to buy. (3/n)
To be sure, there is more than €550bn left to buy in the aggregate sovereign space, but the ECB is very unlikely to drop capital keys (4/n)
With a stable PSPP share, QE could be extended for 9 months at €25-30bn, 6 months at €40bn, or 12 months at €20bn, then full taper. (5/n)
Alternatively, if rescaling comes at full expense of PSPP (stable CSPP), QE could be extended well into 2019, and up to €3trn in total.(6/n)
In the end, it’s all about signaling – the larger the reduction in flows, the longer the extension, and the stronger the guidance. (7/n)
Key is the *credibility* of any extension and option to increase QE, hinging on the extent to which composition addresses scarcity. (8/n)
It could be achieved with simple changes, e.g. keeping corporate bonds purchases unchanged and/or for longer. (9/n)
Either way, guidance on rates & reinvestment will be strengthened as communication continuity should be favoured. (10/10)
