ECB preview: a fine balancing act

W e expect the ECB to announce at its meeting next Thursday an end to net-purchases under the APP prog r amme . While there has been a clear weakening in the economic environment, the ECB will argue that the reinvestment of the stock of bond holding s will ensure a continuing accommodative policy stance justifying an end of the programme . We expect at the same time no change to forward guidance on policy rates at this point . The current stalemate between the Italian government and the EU Commission is complicating things further for the ECB. On the one hand, the ECB will want to avoid any implicit support for the Italian government. At the same time , the ECB will need to keep a close eye on potential contagion of financial tensions to other countries. For now, however, the ECB views any discussion regarding new long-term funding operations as premature. The ECB will also announce guidelines for its reinvestment policy coming Thursday. We expect the guidelines to allow for some flexibility in terms of maturity and the period after which the reinvestment will have to take place, while investments under the PSPP will still broadly adhere to the capital key.