– As expected, the la ECB left policy rates unchanged at its October meeting, although the Governing Council did discuss a cut. The statement was perfectly in line with the tones used at the end of the previous meeting. ..…
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The recovery of the cycle in the euro area is still considered as being gradual, with risks sewed to the downside. Against a background of “unchanged” prospects for low inflation in the medium term as well, the ECB once again confirmed forward guidance this month, and its downside stance on policy rates.
– The main development was the ECB’s explicit opening to new LTROs, although for the time being there are no set dates, nor certainties. The statement says that the ECB is “ready to use all available instruments, including a LTRO” in case of money market conditions developing in such as way as to “have implications for the stance of monetary policy”.
– During the press conference Draghi clarified that the ECB may accept lower excess liquidity as long as the markets do not react significantly, i.e. if the system normalises. In essence, the ECB will not act pre-emptively to reassure the markets,but only in the event of a material change in money market conditions that may compromise price stability in the medium term. In the meantime, they believe that certainty of reaction will be enough to keep money market rates under check.
– The other development concerns collateral policy: Draghi indicated that the ECB is ready to consider accepting the mezzanine tranche of ABS as collateral.
– Draghi confirmed that the ECB is still working on communication, repeating that in all likeliness only an outline of the discussionwill be published, and not actual minutes.
– We believe the ECB will announce another LTRO by December, to be launched in 1H 2014.
The purpose will be to smooth the repayment ofthe two 3-year LTROs, giving more time to banks in peripheral countries to regain full market access. This would be consistent with the longer time frame of the banking union. By December the ECB may also extend full allotment until the end of 2014, reaping no damage at all.
– Instead, a rate cut between now and the end ofthe year seems unlikely, and may be come only in the event of liquidity measures proving insufficient to cool market expectations in the months ahead.
Source: BONDWorld – Intesa Sanpaolo – Research Department
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