The markets had started to expect too much from the ECB, and reacted negatively to the monetary policy announcement. However, the package of measures is far from limited, and introduces the commitment to guaranteeing accommodative monetary conditions for an even longer period than before……
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Intesa Sanpaolo – Research Department For professional investors and advisers only
Judging by the markedly negative reaction of the markets, the package of measures presented yesterday by the ECB should be almost irrelevant: the EUR/USD exchange rate has returned to the same levels as on 6 November, whereas the yield of the 10Y Italian BOT has reabsorbed all the decline incurred in the second half of November. The 3-month Euribor 3 rate implied in the future contract with December 2016 maturity is back at levels never seen since 9 November. In actual fact, the measures announced are far from irrelevant – considering the central bank’s residual margin of action.
First of all, the deposit rate has been cut from -0.20 to -0.30%, whereas the other benchmark rates (scarcely relevant in a context characterised by ample excess liquidity) were left unchanged. In the last few days before the meeting, the market had started to expect more. On this front, the ECB has undoubtedly done less than forecast – given also the lack of additional technical measures aimed at penalising excess reserves above certain thresholds, that had been prospected as an alternative to a rate cut. However, the ECB has also announced the extension of full-allotment on the main refinancing operation and on the quarterly LTRO to embrace all the 2016-17 biennium. This measure guarantees that the central bank will not return to rationing liquidity before the end of 2017, and that therefore until then money market rates will continue to be guided by the deposit rate.
Secondly, the extension was announced of the APP until March 2017 “or beyond if necessary”. Also, the ECB announced the reinvestment of the capital share of securities held in the APP portfolio upon maturity, in addition to the expansion of purchases to embrace local government issues. The expansion is worth 360 billion euros, and together with the reinvestment is worth significantly more than a 10-15 billion per month increase in the flow of purchases between now and September.
Thirdly, although the president stressed less than before the downside risks to the scenario, there is nothing in the statement read by Draghi, nor in his answers during the press conference which rules out the possibility of new accommodative measures being put in place in the future, if required by developments. In fact, the Council will closely monitor the situation, and is ready to act using all the tools at its disposal.
In conclusion, it seems rather disconcerting that the market is now pricing in an interest rate level at the end of 2016 or 2017 that is a hefty 16bps higher than before the meeting: a 3 Euribor rate of -0.02% implies a tightening of monetary conditions that is incompatible with today’s announcement. Apart from the rate cut and the extension of full allotment, it is evident that the ECB intended to signal to the market its determination in keeping rates no higher than their present level for an extended period of time.
Having said this, we should not build up excessive hopes in terms of the ultra-accommodative monetary policy’s effectiveness in relaunching private spending growth. The measures put in place to date have already made access to credit a secondary problem for European businesses, according to the survey published by the ECB this week: the most pressing problem by far is now finding customers, i.e. the demand trend, followed by the recruitment of skilled personnel, and facing competitive and regulatory pressures. Conversely, the compression of interest rates and risk premiums temporarily allows greater leeway to governments, which can implement slightly more accommodative fiscal policies. The only possibility of action is in fact on the fiscal front – albeit not open to all countries. The ECB itself insists, at every meeting, in asking euro area member states to adjust the composition of their budgets to support growth, albeit with no compromise to the Stability and Growth Pact.
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