A number of prominent ECB members have spoken today and some of the comments were interesting in terms of what to expect of the ECB going forward.
ECB president Mario Draghi strengthened expectations for more broad-based QE as he said than an expansion of the purchase programme could include government bonds. Moreover, he repeated that the ECB expects its balance sheet to increase to the size it had at the beginning of 2012 and that the Governing Council is unanimous in its commitment to use unconventional measures should it become necessary. However, Draghi also said that the ECB expects the current measures will have a sizeable impact on the balance sheet and that time is needed for the stimulus to reach the real economy.
Hence, it seems that the ECB would need to be surprised by a low up-take on the December TLTRO before more easing is announced, and we expect the ECB will remain in a wait-and-see mode at the ECB meeting in December. Nevertheless, we believe it will be difficult for the ECB to expand the balance sheet to the EUR3trn target and we expect the ECB to reach for more tools in early 2015.
Yves Mersch spoke in the morning and his comments were broadly in line with Draghi’s view. Firstly, he had some suggestions for unconventional measures and he mentioned buying state bonds, shares and even gold. However, Mersch also indicated that this is not just around the corner, as he said current measures must take effect before considering new measures. Additionally, Mersch said he was not sure if Bank of Japan’s QE has worked and said that unconventional monetary policy measures can also have unintended side effects in the medium and long term if they are used too aggressively or too extensively.
ECB’s chief economist Peter Praet said the ECB projections (to be published in December) could be revised to match the European Commission’s outlook. This would imply the ECB lowering its GDP growth forecast in 2015 and 2016 by ~0.5pp and ~0.2pp, respectively. Likewise, the inflation projection would be lowered from 1.1% in 2015 to ~0.8%, but for 2016 the Commission has a higher forecast for inflation compared to the latest forecast from the ECB.
We do not expect the ECB to revise up its 2016 inflation forecast, but it will probably remain in an area where the ECB can argue that inflation is still expected to increase towards 2% in the medium term.
There was a positive market reaction when Draghi spoke – i.e. periphery spreads tightened, stocks rallied and EUR/USD declined. Hence, the markets believe there is credibility behind his words. However, all ECB watchers also know about the ECB’s distaste for buying sovereign debt. Hence the QE in govies is by no means a done deal, and we might still face disappointments with the ECB in the coming months, especially at the December meeting, if no further measures are announced amid sharp downward revisions of growth and inflation. Overall, today’s comments should be viewed as positive for the sentiment – every time it is mentioned that the ECB could buy government bonds the more likely a scenario it becomes.
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