ECB CHECKLIST: Brexit, Bund Scarcity and Scope for More Cuts
(Bloomberg) -- Any tweaks to the ECB’s QE program and discussion about next steps are in focus as an increasing number of government bonds trade below the deposit rate.
- Draghi’s press conference at 2:30pm CET will be watched for signals on whether further rate cuts are possible given the impact on banks and insurers
- Follow TOPLive for our real-time blog on the ECB rate decision and Draghi’s speech here
- NOTE: Draghi’s opening remarks, Q&A in June here; account of last meeting
- BOND SCARCITY AND THE CAPITAL KEY
- Given the pool of eligible bonds is shrinking, some governing council members favor changing the allocation of bond purchases to be more in line with levels of outstanding debt, a Bloomberg source said at the start of the month
- And the ECB has already been quietly exceeding quotas depending on where bonds are available
- However, most analysts agree that dropping the capital key altogether will be a last resort and the ECB will explore other options first
- OTHER TWEAKS
- While it’s probably too soon to abandon the capital key, there’s a possibility the ECB could tweak other aspects of the program as soon as today, including dropping the maturity limits or allowing the NCBs to buy bonds with yields lower than the deposit rate
- 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
- In June, Draghi said the governing council sees rates at current or lower levels for an extended time; central bank watchers will be looking for any change in that language
- BREXIT
- Draghi reportedly told EU leaders Brexit could reduce euro growth by as much as 0.5% for the next three years and the ECB stepped up cooperation with central banks on FX movements after the vote
- Calm markets, the paucity of data on the economic impact of the vote to leave and the BOE decision to wait and see could see Draghi echoing the MPC’s approach, possibly limiting himself to reiterating that the Euro area’s central bank is monitoring the impact and is ready for all contingencies
- CSPP
- More than a quarter of the corporate bonds the ECB has bought so far have negative yields
- ECB has bought low-BBB names such as RWE, Metro, EdP, Renault, as well as credits with sub-IG ratings including Telecom Italia, Lufthansa, showing it isn’t shying away from taking credit risk, BofAML says
- To date, the volume of bond buying has surpassed consensus expectations, but the ECB may explain this away as an attempt to front-load purchases given historically issuance slows over the summer
- At some point the ECB may extend the program by buying bond issued by financials but few expect any detail on that yet given the program only began last month
- FISCAL POLICY
- Draghi told EU leaders fiscal policy should shift toward investment after the Brexit vote; has repeatedly said monetary policy can’t do all the heavy lifting and Peter Praet called for a concerted effort in fiscal and structural policy
- With Japan apparently readying to provide more fiscal stimulus and the U.K.’s new PM hinting the country may row back on austerity, Draghi may be pressed on how fiscal policy could be used to bolster the impact of the bank’s easy policy
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