Today’s ECB meeting provided little news and resulted in limited market reaction. To begin with the tone was slightly dovish and Mario Draghi repeated the ECB is ‘unanimous in its commitment to also using unconventional instruments’ and said that the heightened geopolitical risks could hurt growth.
• Draghi said that the ECB is about to hire a consultant who will help design an ABS programme. This clearly signals that the ECB is ready to take further action. However, he also said the final decision about an ABS programme has not been taken yet.
• Regarding the new cycle low in inflation, the comments were slightly hawkish and do not point to further easing looking ahead. The 0.4% inflation print did not surprise the ECB, as it was largely due to lower energy prices, while core inflation remained stable at 0.8%. The ECB still expects a gradual upward movement in inflation and sees inflation expectations as firmly anchored, although the current very low inflation rate affects short-term inflation expectations.
• Moreover, the signs of stabilisation in monthly loan flows were mentioned and Draghi said the measures taken in June had led to an easing of the policy stance. This indicates that the ECB is not about to ease again but the tone was softened a bit as Draghi said that credit standards for loans to enterprises overall remain tight seen from a historical perspective.
• Draghi also tried to put pressure on politicians as he said the effectiveness of the TLTROs depends on implemented reforms, as the impact will be limited if it is too hard to start a new business. In line with this, he hinted at the weakness in Italian GDP growth in Q2 as being due to lack of reforms, as he said it was ‘pretty clear’ that countries with reforms were doing better than countries without reforms.
• Overall, it seems that the ECB is waiting for the take-up on the first TRLTO in September. Last month, Draghi said the overall take-up on the TLTRO could reach a maximum of EUR1trn, whereas he today said the market signals a total pickup of EUR450-850bn. The potential take-up will depend on future development in net lending but, according to Draghi’s comments, it will boost liquidity.
• We do not expect the ECB to come up with further easing, if the signs of improvements in lending continue. In line with this, Draghi said the measures taken in June had led to an easing of the policy stance. If the ECB were to do more, an ABS programme still seems most likely, whereas we continue to see the bar for QE as being high.
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