ECB CHECKLIST: Taper Timing, QE Tweaks And The Outlook for Rates
(Bloomberg) -- ECB President Mario Draghi’s conference will be watched for signs on the future direction of policy as most economists see Europe’s central bank leaving policy unchanged for a second consecutive meeting.
- A flurry of political risk events over the coming months, and a new global focus on fiscal policy, means Draghi needs to reassure market players the ECB has more ammunition as well as laying to rest the taper talk that spooked bond markets this month
- Investors will watch Draghi’s press conference at 2:30pm CET for signals on the possibility QE could be tweaked and extended (see preview)
- Follow our live blog on the rate decision and Draghi’s speech
- NOTE: Draghi’s opening remarks, Q&A in September here; account of most recent meeting
- NOTE: EUR swaption volatility ratios are holding above levels before previous ECB easing moves, indicating Draghi is expected to add little clarity on QE extension today, while EUR/USD may rise toward resistance at 1.1077 should Draghi strike a hawkish tone, Bloomberg strategists say
QE EXTENSION, TWEAKS
- Executive Board member Sabine Lautenschlaeger said at the end of September the policies that are already in place need to be given time to work through to the real economy and no additional stimulus is needed at present
- At the last meeting Draghi said the ECB tasked committees to evaluate the Bank’s options
- The Bank will add new policy measures at its final 2016 meeting, according to a Bloomberg survey
- Nearly 4/5 of economists surveyed expect the ECB to add further stimulus at some point and 97% of those expect an extension past March 2017, with December seen as the most likely timing for any announcement
- As well as extending the program, changes could include dropping the maturity limits, lifting issue limits or allowing NCBs to buy bonds with yields below deposit rate
- Tweaks could be announced as soon as today, some economists say
TAPER
- Governing Council hasn’t discussed winding down the pace of its monthly bond buying, ECB media officer Michael Steen tweeted
- The comments came after a Bloomberg article on Oct 4 said there’s an informal consensus that asset buying will have to be tapered once a decision is taken to end QE
- GC member Ewald Nowotny said officials are monitoring developments, in particular inflation, and ECB will “slowly and carefully” reduce asset purchases once the time has come
- Analysts at Barclays say it’s very likely Draghi will be questioned on this during the Q&A but say the GC is unlikely to discuss tapering today
BOND SCARCITY AND THE CAPITAL KEY
- Some policy makers are said to prefer bond purchases being more aligned to levels of outstanding debt; most analysts agree this is politically difficult and the least likely option
- In any case, the ECB has already been quietly exceeding quotas depending on where bonds are available, and the recent move in bond yields means the number of eligible bonds has increased
DEPOSIT RATE
- Given the impact of negative rates on bank profitability, the investment community thinks central banks are approaching the lower bound on rates and will increasingly focus on alternative forms of easing
- Cutting rates further would come with increasing risks, ECB Executive Board member Yves Mersch said this month
- The longer interest rates remain low, the more pronounced the negative side effects will become, he said
- Any deviation from the phrasing that the GC expects rates at current or lower levels for an extended period of time and well past the horizon of the ECB’s net asset purchases will be key
BREXIT
- Draghi may be asked about the GC’s current thinking about the likely impact of Brexit on euro-area growth, given the apparent hardening of the stance on both sides of the channel but relatively resilient data
- At the end of September, he told the European Parliament the extent to which the economic outlook will be affected depends on the timing, development and final outcome of the upcoming negotiations
CSPP
- ECB may extend the program at some point by buying bonds issued by financials, though few expect any detail on that yet given the program only began this summer
FISCAL POLICY
- “In a world of very low interest rates, monetary policy cannot be the only game in town –- and we should not pretend it can be,” ECB’s Mersch said at Harvard University this month
- That echoes comments from Draghi in September that other policy areas must contribute much more decisively to reap the full benefits from monetary policy measures
- A shift toward fiscal policy would have an important implication for asset prices, so while Draghi may continue to ask governments to step up structural reforms he will likely balance that with reassurance that the Bank will do more too, if needed
INFLATION
- Where the bank expects inflation to be at the end of its forecast period is a key factor in how the Bank will proceed
- Any update on Draghi’s comments that the ECB will reach its inflation goal by end-2018 or early 2019 linked to stimulus will be another key part of today’s communication
GREECE
- This week, Kathimerini newspaper reported that the Bank’s initiative to find a commonly acceptable solution to Greek debt relief issue is under way, citing an unidentified bank official
• On Oct. 12, ECB Executive Board member Benoit Coeure said the country cannot gain “solid and long-lasting market access without the clarity about the sustainability of Greek debt” • The GC will consider purchases of Greek bonds at a later stage, once it has clarity about measures that are being implemented by government, he said
Alert:
HALISTER1Source: BFW (Bloomberg First Word)
Tickers 2539Z GR (European Central Bank)
People Mario Draghi (European Central Bank)
Benoit Coeure (European Central Bank)
Michael Steen (European Central Bank)
Yves Mersch (European Central Bank)
To de-activate this alert, click
hereUUID: 7947283