The ECB not only revised upwards its growth estimate for 2016 (1.9% from 1.5%) but also raised its inflation estimate for next year (to 1.5% from 1.3% in December). More importantly the ECB believes the programme may restore inflation to 1.8% in 2017, broadly in line with the target rate…………
Intesa Sanpaolo – Research Department – For professional investors and advisers only
The ECB meeting, as in part expected, only provided a few more details on the PSPP (Public Sector Purchase Programme, the official name given to the programme due to begin on 9 March, and which adds itself to CBPP3 and ABSPP). The documents published by the ECB at the end of the press conference (the legal ruling, the press release, and a Q&A section) also show that the central bank does not want to overly restrict flexibility in implementing the programme. We understand this, as in some jurisdictions the purchases could exert pressures on the government bond market.
The technical communiqué confirms that the ECB will attempt to limit market distortions to a minimum, and respect a neutrality principle. Purchases by maturity should be weighted based on outstanding debt, with a maturity of between 2 and 30 years; however, the ECB will also verify, during implementation and based on daily flows, how to respect the neutrality criterion. Also, a black-out period (Art. 4.1) is provided for in order not to disrupt activity on the primary market, and the initiation of a security loan service. As defined by the legal framework with Art. 7, implementation will take place through the Eurosystem’s official counterparts; this means that the purchases will be made based on bilateral transactions, and not using more rigid mechanisms, such as purchase auctions. Also, the allocation ceilings set in Art. 6 between NCBs (National central banks) and the ECB, as well as the split among NCBs, are referred to the “total value” of the bonds purchased, a formulation that will allow, if necessary, a modulation of monthly flows by bond class and by country, based on market conditions. Lastly, as the goals are defined in terms of the market value of bonds rather than their nominal value, a further degree of flexibility stems from the presence of securities that are traded well above par (a factor that also helps mitigate the possible risk of scarcity effects on some markets).
A strict limit, on the other hand, has been set on the yield of eligible bonds: based on Art. 3.5, yield to maturity cannot be lower than the rate applied on the deposit facility (currently -0.20%). Around that threshold, banks could opt to retain liquidity as deposits rather than in government bonds. Another firm aspect is the segmentation of purchases: “each NCB shall purchase eligible securities of issuers of its own jurisdiction”, whereas “Securities issued by eligible international organisations and multilateral development banks may be purchased by all NCBs”.
As regards rhetoric, the tone of the press conference was somewhat more hawkish than we expected. The ECB not only revised upwards its growth estimate for 2016 (1.9% from 1.5%) but also raised its inflation estimate for next year (to 1.5% from 1.3% in December). The ECB noted that risks for 2015-16 have eased, thanks to the monetary policy measures introduced in January. Most importantly, the ECB believes the programme may restore inflation to 1.8% in 2017, broadly in line with the target rate. Real growth should accelerate over the next two years, to 2.1%, helping close the output gap by the end of 2017. During the press conference Draghi indicated that the ECB expects an acceleration of domestic demand, driven by the price of crude oil, the depreciation of the exchange rate, and QE, and thinks it unlikely that financial resources will be saved rather than spent. In principle, medium-term forecasts suggest that the normalisation of monetary policy could begin in mid-2017, if medium-term growth and inflation estimates are confirmed. However, Draghi made a point of stressing that an ample margin of uncertainty is still weighing on forecasts for 2017, letting on that all options remain open.
Quelle: BONDWorld.ch
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