Ecb watch 8 september 2016

ECB Watch

Group Economics Macro & Financial Markets Research

8 September 2016

ECB disappoints, but will act soon 

ECB left monetary policy unchanged but hinted at action going forward



Governing Council tasked committees to look at options to change QE…



...to increase universe of assets with all options on the table

Research



Given ongoing low inflation outlook (1.6% in 2018) and downside risks…

Tel: +31 20 343 5616



…we continue to expect an extension of the QE horizon

Nick Kounis Head Macro & Financial Markets

nick.kounis@nl.abnamro.com

ECB leaves monetary policy unchanged…

Aline Schuiling Senior Economist

The ECB disappointed keeping its monetary policy stance completely unchanged. The

Tel: +31 20 343 5606

inaction with regard to policy rates and the pace of QE purchases was as expected. However,

aline.schuiling@nl.abnamro.com

we had expected the Governing Council to expand the horizon of its QE programme. The ECB also did not announce changes to its QE programme to increase the universe of eligible

Kim Liu

assets at the press conference.

Senior Fixed Income Strategist Tel: +31 20 383 6188

…but signals action in the coming months

kim.liu@nl.abnamro.com

However, ECB President Draghi left the door open for action in the coming months. He said that the Governing Council had tasked committees to evaluate various options for the smooth implementation of QE, reflecting the necessity to increase the eligible universe of assets. The President clarified that the committees had a full mandate to look at all options (including adjustments to the capital key), though the Governing Council will make the final decision.

ECB projections for GDP growth …

… and inflation revised slightly lower

%

%

2.0 1.6 1.5

1.7

1.7 1.7

1.8 1.6

1.7

1.4

2.0 1.6 1.6 1.6

1.6 1.5

1.0

1.0

0.5

0.5

1.3 1.3

0.1 0.0

1.2

0.2 0.2

0.0 2016 March 2016

2017 June 2016

2018

2016

September 2016

Source: ECB June 2016 staff macroeconomic projections

March 2016

2017 June 2016

September 2016

Source: ECB June 2016 staff macroeconomic projections

Insights.abnamro.nl/en

2018

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ECB Watc ch – ECB dis sappoints, but b will act s soon – 8 September 2016

Second, although the E ECB had not discussed an ex xtension of the programme att this meeting, Mr Draghi asserted tha at it remained ready, r willing and able to act. In addition, he e said the ECB’s decision that acction was not ne ecessary was a judgement foor ‘the time bein ng’. Finally, the ECB B continues to fo forecast that infflation will unde ershoot the goaal (see below),, and that it was a matter of concerrn that underlyiing inflationary pressures werre not picking up. u At the same tim me, the risks to o the economic outlook remain ned tilted to thee downside.

Medium m term inflation n still undersh hooting Indeed, there t were som me slight downward revisions s to the outlookk for GDP grow wth and inflation in 2017 and 20 018 in the ECB B’s updated pro ojections, from already low lev vels. Crucially, the ECB B’s inflation projjection for 2017 7 was revised slightly s lower (ffrom 1.3% to 1.2%), while the centrral bank contin nues to forecas st an undershoo ot of inflation inn 2018 (1.6%). The ECB’s forecast for core inflatio on in 2018 was s unchanged at the relatively low level of 1.5 5%. The forecast for GDP growtth in both 2017 7 and 2018 was s revised downn from 1.7% to 1.6%.

Accordin ng to the centra al bank the risk ks to growth and inflation rem mained tilted to the downside.

Mr Draghi mentioned th hat it would tak ke “a bit longerr to reach the 22% target, but not n much longer”.

We expe ect an extensiion of the QE horizon We think k the ECB will e expand the durration of its QE E programme frrom March 201 17 currently to Septemb ber 2017 before re the end of this year and mo ost likely at thee October meetting. The momentum behind the eurozone reco overy has slow wed and the oveerall pace of ec conomic growth re emains too mo oderate to gene erate significan nt underlying innflationary pressures any time soo on.

Steps to o increase uniiverse of asse ets As signa alled, the ECB w will also likely announce a chan nges to its QE programme to increase the universe e of eligible asssets as it will no ot be able to meet even its cuurrent targets under u the current structure. s We th hink there are two possible options (either sseparately or in n combina ation). The ECB B could decide to start buying g bonds that yieeld less than th he deposit rate (so far re estricted) as we ell as buying bonds below the e 2y maturity. S Second, it could increase the issue/iss suer limit from tthe current 33% %. We think tha at another ofte n-mentioned option o – the dropping g of the capital key allocation system for purrchases and m moving to an outstanding debt allocation scheme – is not likely. Such a move is supported by onlly a minority off the Governin ng Council at th he ECB will like ely opt for otherr options first. his time and th

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ECB Watch h – ECB: no ot now but la ater – 8 Sep ptember 2016

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