Draghi surprised again, stepping up the rhetoric more than expected. But what is effectively in store for March?…..<\/p>\n
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Sign up for our free newsletter to receive weekly news from BONDWorld. Click here to register for your free copy<\/strong><\/span><\/a> <\/strong><\/span><\/a><\/span><\/p>\n Intesa Sanpaolo – Research Department For professional investors and advisers only<\/strong><\/p>\n A deposit rate cut is virtually a given. The ECB is also likely to announce changes to the APP parameters at the next meeting. But we remain more sceptical on an increase in monthly purchases volumes, which depends on the evolution of risks to growth and inflation. The ECB is running short of ammunitions and will want to use them parsimoniously.<\/p>\n The message sent by the ECB was undoubtedly more accommodative than expected. Probably, turbulences on the markets prompted the ECB to stop hesitating and spend the announcement effect at the January meeting rather than waiting until March. As we expected, the statement acknowledges that the balance of risks has worsened in the past month, for both the growth and inflation trends. Consequently, the ECB could “possibly reconsider our monetary policy stance at our next meeting in early March”, and in the meantime “work will be carried out to ensure that all the technical conditions are in place to make the full range of policy options available for implementation”. Draghi repeatedly stressed that the Governing Council has “the willingness and the determination, but also the cohesion that’s necessary to take the actions that are needed”, and that “there are no limits to how far we are willing to deploy our instruments within our mandate” to achieve the medium-term inflation goal”. Draghi specified that “there are no technical limits” preventing the ECB from acting to achieve its mandate. The ECB also clarified that, this time around, the communication strategy is unanimously supported by all Council members. But what should we expect in tangible terms?<\/p>\n Surely, a deposit rate cut in March would be relatively unhindered. A sharper cut of the deposit rate had already been discussed in December, and had not met with particular opposition by the less dovish members – save for opportunity objections tied to the risk of the ECB using up all the instruments available to it. In our view, faced with a deterioration of inflation estimates for 2016-17, the ECB could act on the deposit rate in March, rather than in April as we expected before the meeting.<\/p>\n For what concerns further possible measures, based on the statements made on Thursday, in March the ECB may also announce changes to the APP’s implementation parameters. The possibility of changes being introduced had already been considered in December, and the statement indicates that the Council is moving in this direction. However, it is not clear which parameters may be changed. In his answer to a question from a journalist, Draghi did not rule out that the changes may involve the capital keys rule, he was simply elusive and said that there are no technical limits. In our view, reference is probably to the single issuance detention limit, which, if lifted, would make it possible to further expand the APP, an otherwise complex feat due to the increasing shortage of available securities from some issuers.<\/p>\n Changes to the APP implementation parameters, therefore, would be a preparatory step in signalling the possibility of an increase in the monthly volumes of purchases. Although communication was geared to reassure, it is obvious that the ECB is running short of arrows In its quiver, and those that are left are less and less effective. Also, the minutes of the December meeting indicated that in order to overcome opposition to a further expansion of the APP, a clear deterioration of the macroeconomic scenario is needed, in addition to, in our view, possible indications that euro area growth could slow, rather than accelerate. For now, the information gathered suggests a worsening of the balance of, but not such a negative scenario.<\/p>\n It should also be said that the statement warns that the ECB could “reconsider” its monetary policy stance”. Therefore, we cannot take for granted that in March the ECB will do what it didn’t do in December. i.e. implement a shaper deposit rate cut and step up the volume of monthly asset purchases. Data, and the trend of inflation expectations, remain the key factors in guiding the ECB’s moves. However, the ammunition available to the ECB is running short, and the Council will want to use it sparingly, despite the more reassuring and possibilistic than expected communication used at the beginning of the year anno. The suspicion is that Draghi intended to reap immediate effects on sentiment, and has succeeded in doing so, although he now runs the risk of disappointing market expectations in March.<\/p>\n <\/p>\n Source: BONDWorld.ch<\/p>\n","protected":false},"excerpt":{"rendered":" Draghi surprised again, stepping up the rhetoric more than expected. 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