Ecb watch preview october meeting 14 october 2016

ECB Watch

Group Economics Macro & Financial Markets Research

14 October 2016

ECB on hold next week, set to act in December Nick Kounis Head Macro & Financial Markets

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The ECB meets next week …

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… against the background of worries that it will soon taper its purchase

Research Tel: +31 20 343 5616 nick.kounis@nl.abnamro.com

programme 

The idea of tapering was dismissed at the ECB’s Governing Council meeting of September …

Aline Schuiling Senior Economist

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… and is not justified by the outlook for growth and inflation

Tel: +31 20 343 5606

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We continue to expect an extension of the QE horizon ...

aline.schuiling@nl.abnamro.com

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… while the ECB should also drop the deposit rate floor for its purchases

Kim Liu Senior Fixed Income Strategist Tel: +31 20 383 6188

ECB on hold in October, set to act in December

kim.liu@nl.abnamro.com

The ECB meets next week against the background of worries that the central bank will soon taper its asset purchase programme. These concerns look overdone to us. We think that the ECB will instead extend its QE programme and take steps to increase the eligible universe of assets before long. This will most likely be at the December meeting rather than the October one. Some ECB officials have suggested the Committees looking into changes to the QE programme will take time to report, while the Governing Council will also have the benefit of the updated staff macro projections in December.

Official ECB communication suggests stimulus will continue The view that tapering fears are not currently justified was supported by the account of the ECB’s Governing Council meeting of 7-8 September. Members ‘noted that there was still no clear upward trend visible in measures of underlying inflation, which remained low’. This is a crucial statement, as the ECB’s forward guidance on QE (from the press statement) is that ‘it will continue until (we see) a sustained adjustment in the path of inflation consistent with its inflation aim’. So clearly this condition is not judged to have been met. In addition, the Governing Council judges that the projections of rising underlying inflation are contingent of ongoing stimulus. According to the account ‘the projected path of inflation was conditional on exceptionally supportive financing conditions, which to a large extent reflected the current accommodative monetary policy stance and prevailing market expectations about the future course of monetary policy’. The Governing Council therefore judged that it was ‘of crucial importance to preserve the very substantial degree of monetary support that was embedded in the staff projections’.

Insights.abnamro.nl/en

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ECB Watc ch – ECB on n hold next week, w set to o act in Dece ember – 14 October O 20116

Eurozone HIICP inflation ….

… and the ECB’s projection ns for 2017-20 018

%

%

2.0 0

4

1.6 6

3

1.5 5

1.2

2

0

0.5 5

-1 00

02

04

HICP total t

06

08

10

12

H HICP core

14

0.2

0.0 0

16 6

2016

ECB target

Source: S Thomson R Reuters Datastrea am

1.2

9 0.9

1.0 0

1

1.5

201 17 Headline

2018 Core

Sourc ce: ECB Septembe er 2016 staff macrroeconomic projec ctions

on outlook Subdued core inflatio ount also stresssed the importtance of rising wage growth ppushing up serv vice sector The acco inflation in the ECB’s a assessment tha at core inflation will rise in thee coming period d, given that ely remain subdued. Data rele eased since thhe meeting cast doubt on this goods prrices would like view. Fo or instance, a re eport published d on 16 Septem mber showed thhat growth in hourly h wages and sala aries slowed to 0.9% yoy in Q2 Q from 1.7% in n Q1 (see chart rt). With econom mic growth lacklustrre, wages subd dued, core impo ort prices falling and inflation expectations dislodged, d core infla ation does not look like accelerating any tim me soon in our vview. Indeed, fundamentals f actually point in the op posite direction n.

No underlying in nflationary prressures % yo oy

3.0 0 2.5 5 2.0 0 1.5 5 1.0 0 0.5 5 0.0 0 12

1 13

14

LCI waages & salaries

15

16

Unit labour co osts

Sourc ce: Thomsom Reuuters Datastream,, ABN Amro Group Economics

ECB to extend e in Dec cember, drop depo d rate floo or We there efore continue to think that th he ECB will exp pand the durati on of its QE prrogramme from March 2017 curre ently to Septem mber 2017 in De ecember. As it signalled in Se eptember, the nounce change es to its QE pro ogramme to inccrease the univ verse of ECB will also likely ann eligible assets a as it willl not be able to o meet even its current targetss under the existing structure e. The ECB wil l likely decide to t start buying bonds that yieeld less than the e deposit rate (so far re estricted) as we ell as buying bonds below the e 2y maturity. F Finally, we also o expect that

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ECB Watc ch – ECB on n hold next week, w set to o act in Dece ember – 14 October O 20116

the ECB B will relax the ccriteria to conduct substitute purchases. p Thee relaxation will mean that the centrral bank can te emporarily deviate its purchas ses from the caapital key for co ountries which have nott enough eligib ble outstanding bonds. This ch hange will ensuure a smooth execution e of the programme and wi ll be a compromise with the hawkish h membbers of the Gov verning Council. We maintain the view that Bund B yields are e likely to declinne further, espe ecially at the short end d of the yield ccurve. We will therefore likely see a bull steeepening of the yield curve (please also a see attach hed note for mo ore on this – fo or professional clients, please e see disclaimers in the docu ument).

Tweaking T the floor will cre eate just enou ugh room

ECB will w free up bo onds by remo oving the floo or

Ho oldings as % of eligible universe, se elected countries only o

b all eligible markets included, seleected countries only In EUR bn,

60

1000 0

50

800 0

40

600 0

30 400 0

20

200 0

10 0

0 PT

FI

Supra NE

GE

SP

IR

AT T

FR

BE

IT T

FR

Holldings as percentage of remaining unniverse Sou urce: ABN AMRO O Group Economiccs, Bloomberg, EC CB

GE

S Supra

Removal of floor

NE

BE E

AT

IR

FI

IT

Loweringg of 2y to 0.5y matuurity

Source: ABN A AMRO Group Economics, Bloo oomberg, ECB

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