The effort made in communicating that the Council expects the ECB’s balance sheet to move towards the March 2012 peak level, and that ECB staff and the relevant Eurosystem committees are at work to prepare new accommodative measures to put in place if needed, was welcomed by markets, as it eased concerns over deep rifts within the Council…..
Intesa Sanpaolo – Research Department – For professional investors and advisers only
We believe the ECB may announce more attractive conditions on TLTROs already in December, and possibly corporate bond purchases by early 2015.
We continue to think that government purchases remain a measure of last resort, in any case unlikely before March-May 2015.
The November ECB meeting brought important changes in terms of communication. The press release states that “Together with the series of targeted longer-term refinancing operations to be conducted until June 2016, these asset purchases will have a sizeable impact on our balance sheet, which is expected to move towards the dimensions it had at the beginning of 2012”. Therefore, the Council has apparently reached an agreement on explicit reference to a onetrillion euro expansion of its balance sheet, while a few days ago Reuters reported of deep rifts within the Council on Draghi having been so explicit back in Spetmber. Moreover the statement indicates “The Governing Council has tasked ECB staff and the relevant Eurosystem committees with ensuring the timely preparation of further measures to be implemented, if needed”.
During the press conference Draghi stressed that the decision to report in writing on the likely dimension of its balance sheet expansion and further action, if needed, was taken unanimously. As regards press rumours on disunity within the Council, Draghi sought to reassure that differences in opinion are positive for the discussion, and that the Council had “one of the best ever dinners” in which debated on the publication of minutes or “public accounts” of ECB meetings , whereas in recent days the press had spotlighted this as a prickly issue for President Draghi, accused of pursuing a conflictual management style. Draghi specified that he expects a decision to be taken by December, based on careful groundwork by the staff. Draghi did not provide hints on whether the ECB wl also revise its 1,4% inflation estimate for 2016.
The conditions which would prompt the ECB to add stimulus are:
1) a further drop in inflation expectations
2) and/or evidence that recent measures have failed to reap the desired effects on the credit trend.
Draghi pointed out that in December the ECB staff will revise growth and inflation forecasts downwards, bringing them more in line with the latest consensus estimates (0.8-1.2 for growth, 0.5-1.0 for inflation respectively in 2014 and 2015), but that in any case expectations are for a gradual recovery of the economic cycle.
In our view, the ECB may 1) introduce even more attractive conditions on TLTROs already in December (narrowing the spread, further extending the pool of assets eligible as security, and/or lengthening the average life of the operations to be launched between March 2015 and June 2016, to four years; this would allow a smoothing of the liquidity drain beyond September 2018. Another possibility is that the ECB may admit borrowed funds to amount to more than three times the benchmark); 2) should the measures in place prove ineffective on credit dynamics or should the ECB fail to purchase sizeable volumes of covered and ABS (say 1,2 billion for each on average a week so to reach a 200 bln increase in the balance sheet in 2 years) the GC may extend the purchases of private assets to corporate bonds by early 2015. Draghi specified that the purchases had not been fully considered by the Council as they are busy finalising details on ABS, but corporate bonds can be admitted according to the ECB manual.
We stick to our view that the central bank is unlikely to extend purchases to government bonds anytime soon, not only because for the baseline forecast remains for a gradual and modest recovery but also in light of the failure to gel consensus within the Governing Council. Moreover an assessment of OMTs legitimacy remains pending, and Draghi also referred to the current level of yields.
Source: BONDWorld.ch
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