Daily Insight
Group Economics Macro & Financial Markets Research
08 July 2016
ECB saw significant negative Brexit spillovers Macro & Financial Markets Research team Tel: +31 20 343 5616 nick.kounis@nl.abnamro.com
ECB meeting minutes - The account of the ECB's June monetary policy meeting, which pre-dates the outcome of the Brexit vote, suggested the Governing Council remained concerned about the inflation outlook. It also identified a possible Brexit as a risk to the outlook. The ECB reiterated its concerns on the persistence of weak underlying price pressures and possible second round effects. The ECB also expressed its concern that market-based measures of inflation expectations remained depressed. For instance, the 5y5y forward had not picked up despite the rise in oil prices. Meanwhile, it saw risks to the economic outlook as being tilted to the downside. One of those risks was the upcoming UK referendum. Governing Council members judged that 'there could be significant...negative spillovers to the euro area via a number of channels, including trade and the financial markets. At the same time, the ECB expected that the CSPP and TLTRO-II programmes would provide further stimulus and in general the monetary policy measures taken could 'potentially have a stronger impact (on inflation) than assumed in the baseline'. The ECB also addressed concerns that it would not be able to source enough bonds in its QE programmes. It noted that 'if assets were indeed close substitutes, it should not matter much which precise assets were being purchased under the APP suggesting that ECB was open to substitute assets where it was exceeding limits with others. However, it would still broadly stick to the capital key approach, as it noted that 'the composition of purchases still mattered'. (Kim Liu & Nick Kounis) ECB base case - We expect the ECB to step up and extend its QE programmes before long. The ECB was projecting an undershoot of its inflation goal in June and we are sceptical that its existing stimulus measures will be sufficient to close the gap. In addition, since then, the economic outlook has deteriorated. We have lowered our 2017 GDP forecast to 1% from the 1.6% we saw pre-Brexit. More importantly, ECB President Draghi has signalled that Brexit could strip around 0.5%-points off eurozone GDP growth over the coming years. This should mean lower underlying inflationary pressures. We expect the ECB to step up its monthly asset purchases to EUR 100bn from the current EUR 80bn. We also expect it to extend the duration of the programme to end-2017 from March of next year (which is the current soft end date). It will need to take concrete steps to increase the eligible universe, as under the current restrictions, it will not be able to meet its targets for the government bond purchases of some countries, most notably Germany. We expect the ECB to exhaust other options before even seriously considering moving from the capital key weighting system for purchases to a debt weighting. These options include removing the rule that the ECB can only buy assets yielding more than the deposit rate, or raising the issuer limit for some countries. Indeed, the tight spread of Italian bonds (which would benefit the most from a debt-weighted purchase system) over Germany, in our view, could reflect misplaced expectations that the capital key will be abolished. Certainly considering the banking sector and political risks the country faces. (Kim Liu & Nick Kounis) Global Macro - Industrial production in Germany fell by 1.3% mom in May, following a 0.5% increase in April. The outcome was weaker than expected and followed upon a
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Bloomberg: ABNM