We expect the ECB to remain in wait-and-see mode at the meeting in November and we believe the tone will be more dovish compared to the latest meeting in October, when Mario Draghi signalled that QE in sovereign bonds is not just around the corner, see ECB meeting: QE in sovereign bonds not just around the corner, 2 October 2014.
The dovish stance should follow as the pressure on the ECB increased during October: actual inflation has only increased slightly despite significant base effects from last year’s decline, inflation expectations have declined further, growth momentum has weakened and market turmoil has been a concern (see more below). We believe Draghi will be less defensive and will thus be interpreted as more dovish, although the ECB is still waiting for the economic impact of the measures announced in June and September.
Draghi is likely to put a lot of focus on the Covered Bond Purchase Programme (CBPP) at the meeting on Thursday. The ECB has so far conducted secondary market purchases of EUR4.8bn in just eight trading days and has thus maintained a high run-rate throughout the period. This should give the CBPP programme credibility and hence be positive for the markets while it buys Draghi some more time .
Overall it is our expectation that the ECB will keep its powder dry, even though there are arguments for more easing. In terms of policy rates, Draghi has repeated that the ECB has reached the lower bound on rates and technical adjustments should no longer be possible after the latest cut in September.
Concerning non-standard measures aimed at boosting the balance sheet, we expect the ECB to remain in wait-and-see mode at least until it has the results of December’s TLTRO auction. The Governing Council seems determined to obtain a sizeable impact on the balance sheet in order to get inflation back at 2% but there is still an element of ‘passive provision’ in the monetary policy, as the TLTRO depends on banks’ demand for liquidity.
Regarding QE in sovereign bonds, there is a clear opposition from the Bundesbank and in our view the fact that the ECB introduced negative rates and dug deep into the toolbox of unconventional measures suggests that the bar for broad-based QE is high and that some members doubt the effectiveness of this. Draghi has also said that QE is most effective if it is concentrated on activities close to the credit easing components of the financial assets and because of that the ECB now starts buying ABS.
Instead of going down the QE path, the ECB could start buying corporate bonds. Such a move would have a positive market impact, as it would show that the ECB is determined to boost its balance sheet.
The market focuses on how far the discussion on expanding the QE programme to other assets has come. Still, it would be a surprise if the ECB already announces new measures.
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