A QT Announcement This Week Would Be A Risky Play For The ECB

Given the acceleration in policy rate tightening and clear hawkish momentum within the GC, speculation has been mounting on a possible announcement on quantitative tightening. Some sell-side analysts believe that this could come as early as this week. In the current environment, nothing can be off the table, but we would still downplay this possibility for now.

• President Lagarde has previously indicated that QT would begin once policy rates have been normalized. Although there is no official estimate of the neutral rate, some policymakers have hinted that it is around the 2% level. As such, even with a 75bp hike in October, the policy rate would still be some way off neutral and a QT roadmap would seem premature.
• The recent turmoil in UK markets will surely be front-and-centre in the minds of policymakers as they contemplate an unwinding of asset purchase programmes. Misjudgment could trigger a disorderly sell-off and damage the ECBs credibility.
• Having previously ditched forward guidance on upcoming policy rate moves, it seems unlikely at this stage that the ECB would pre-commit to a path for normalising the balance sheet.
• As such, while President Lagarde may indicate that discussions on QT are taking place and that this will naturally follow the normalisation in rates, we would be surprised to see a formal roadmap being unveiled this week. This would otherwise constitute a significant hawkish surprise.