ECB Review: Bottlenecks bottled - RBS

Research Team at RBS, notes that the ECB left all of the broad parameters of its monetary policy programme unchanged in its September policy meet yesterday.

Key Quotes

“Many observers, ourselves included, had anticipated a 6 month extension to the asset purchase programme (APP) to September 2017. The ECB reaffirmed instead its plan to run the APP to March 2017 or beyond. The even bigger surprise was that Draghi stated during the press conference that an extension of QE was not even discussed during the meeting.

This decision to leave the forward guidance unchanged – and even refrain from discussing the issue - was possibly motivated in part by the absence of any material revisions to the ECB staff’s growth and inflation projections. We had assumed that modest downward revisions to the outlook for 2017 (that have in fact been made) would be sufficient to motivate that change. This is clearly a hawkish signal to those like us who believe there is insufficient policy accommodation to generate higher domestic inflation in the period ahead.

Indeed we remain of the view that Eurozone growth and inflation outcomes will disappoint the ECB’s (and consensus) forecasts in the coming weeks. The recent dataflow – for growth and inflation – has been disappointing. And still-sluggish global growth, lingering regional imbalances, relatively high levels of policy uncertainty and a fractious political environment leave us cautious about the outlook from here.

And this suggests to us - despite the hawkish message – that further easing will be communicated before too long. We are specifically expecting the monthly asset purchase programme (APP) to be lifted to around €100 billion at the December meeting (from the current pace of €80 billion) and for the deposit rate to be cut to - 50bps (from -40bps). The risks to the timing of this view, however, are almost certainly tilted toward some easing that emerges later than we are forecasting not least given the absence of any firm easing bias from the ECB today.

The ECB does not want to be hurried. But we believe there is acceptance that a QE extension is coming. Committees have been “tasked” to look at ways to redesign the APP. This could be just precautionary, but we doubt it. In addition, Mr Draghi’s comments that data didn’t warrant a move “for the time being”, and his choice to highlight Dr Praet’s analysis that inflation lacks “a convincing upward trend” together with the Introductory Statement language that QE will continue “until the Governing Council sees a sustained adjustment in the path of inflation”. With regard to programme redesign, we are assured that “the committees have full mandate”, including, apparently to recommend a move away from the Capital Key as a basis for NCB quotas, although this is not our base case.”