It will take a while longer to assess the situation: the UK referendum has not caused a tightening of financial conditions, nor it had dramatic effects on domestic demand in the United Kingdom. The situation will be reassessed in September………….<\/p>\n
<\/p>\n
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 As expected, the ECB left monetary policy I’m Unchanged at its July meeting.<\/strong> The Council did not discuss specific interventions in detail, and will wait until September, when more information will be available, including the new ECB staff forecasts. However, the tones used in the statement and during the press conference were once again markedly accommodative, and Draghi reasserted the willingness, readiness and ability to act “using all instruments available within its mandate”.<\/p>\n All considered, the assessment of the risks weighing on the macro outlook remains skewed downwards,<\/strong> although neither the statement, nor Draghi’s words gave evidence of a significant deterioration compared to June. In general, the ECB acknowledged that geopolitical risks have increased, as was virtually taken for granted, although it does not expect overly negative impacts. The Council noted that the financial markets reacted with “encouraging resilience” to the outcome of the UK referendum, and that financial and credit conditions in the euro area remain markedly supportive, thanks to the ECB measures is already in place. Furthermore, it is too soon as yet to quantify the effects of the vote on the euro area’s growth prospects through the trade channel. While UK PMIs suffered an abrupt decline in July, the Bank of England’s quarterly survey noted that “uncertainty among businesses has increased significantly”, but also an attitude to “carry on as usual”, and concluded that “there is no clear evidence of a violent and widespread slowdown in activity”. Therefore, any negative spill-overs on the euro area will probably prove to be gradual and limited. Draghi confirmed that the ECB expects Brexit to cut GDP growth in the euro area by between -0.2% and -0.5% over three years, while also stressing that these estimates should be taken with caution. For what concerns the inflation trend, Draghi noted that June data even brought some upside surprises, and most importantly, he stressed that the latest ECB survey of official forecasters, conducted after the UK referendum, kept inflation expectations on a five-year horizon at 1.8%, in line with the previous survey.<\/p>\n We believe that in September the ECB will revise down its growth estimates by two or three tenths in 2017-18, in order to justify an increase in monetary stimulus.<\/strong> We think the asset purchase programme will in all likeliness be extended to beyond March 2017, by at least three months, but more probably by six. Such a decision would bring obvious benefits, as it would shield bond yields from the risks that political events may pose next year, and help reduce banks’ exposure to governments. However, it will be necessary to prepare the ground by stepping up the pool of purchasable assets. We believe the ECB will intervene on the limits imposed on the holdings of securities without CACs, and on the yield floor, which at present cannot be lower than the deposit rate. The ECB may consider deviating from the capital keys rule, which governs asset purchases, only in the event of major dislocations.<\/p>\n Draghi used reassuring words on the health of the European banking system, noting that the system is generally more capitalized and more liquid than in 2009, and that the current problems are mostly tied to profitability.<\/strong>On the management of non-performing loans and on the possibility of public support to bolster the capital of banks, the president’s statements on these topics were markedly “institutional” and in line with past communication. Draghi believes it will take time to dispose of deteriorated loans, but the process could be sped up by: 1) regulation and ongoing supervision; 2) the development of a market for NPLs; 3) public intervention in exceptional circumstances, disciplined by community rules and within the boundaries of single market regulations, to prevent a “sell-off” of NPLs.<\/p>\n Appendix Important Disclosures<\/strong> Source: BONDWorld.ch<\/p>\n","protected":false},"excerpt":{"rendered":" It will take a while longer to assess the situation: the UK referendum has not caused a tightening of financial conditions, nor it had dramatic effects on domestic demand in the United Kingdom. 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