ECB – Hint at bond buying and announcement of more money market liquidity (Astrid Schilo, Senior European Economist)
– Bond buying programme is ongoing
– Increased money market liquidity via new 6 mth tender, roll-over of 3 mth full allotment
– ECB rates on hold at 1.5%, unchanged key expressions, more emphasis on growth uncertainty
* Bond buying: dipping back in
The most urgent question was will the ECB intervene in bond markets again? The answer has to be “yes”, as ECB head Trichet mentioned he wouldn’t be surprised if “you see a market response by the end of the press conference”. According to M Trichet, there was an overwhelming majority for bond buying, while the decision to provide more liquidity to money markets and to keep the refi rate unchanged at 1.5% were unanimous. The ECB head did not provide more information on the intervention, but Reuters quotes EU monetary sources that the ECB is just buying Irish and Portuguese bonds. These are small markets, where liquidity is extremely thin. Hence, intervention is “easy”. The problem with a big market like Italy (debt stock of EUR 1.6trn in 2010) is that intervention has to be massive. As an example, in May of 2010, when the ECB moved the market significantly, it had to buy EUR 16.5bn in the 1st week. The Greek debt stock is around 1/7th of Italy’s. This means intervention to a similar scale would have to amount to EUR 111bn, which is just massive.
* Increased money market liquidity – part of the compromise?
The ECB feels responsible for money markets (and less so for government bond yields). Hence, it was a much easier decision for the ECB Council to increase its liquidity provision. It can also be seen as part of a compromise solution to ease financial market tensions, though the source comes from the fiscal side. While there are signs for renewed tensions in money markets (chart 1), they are not at extremes. So partly the ECB’s action can be seen as a pre-cautionary measure, and it may be preferable to act now as opposed to let tensions grow further.
The new 6 month LTRO will be allotted on August 10, and settled on August 11 (that is when it will be in the market). Furthermore, the 3 month tenders in October, November and December will be fixed rate with full allotment. This is a roll-over of the existing arrangement, and in theory, a decision on this would have only been due in September. So the ECB is again taking pre-cautionary measures and tries to provide more security to the market by announcing ample liquidity for the rest of the year. The full allotment of the weekly operations will go at least until January 17 2012 (prolonged from at least until 11 October 2011), but expectations were anyway that full allotment for the one week tender will remain the foreseeable future.
* ECB statement – more focus on uncertainty, other changes are marginal Last but not least let us talk about the ECB’s rate stance! Most is unchanged. The “monetary policy stance” remains accommodative, and the ECB will continue “to monitor very closely” all developments with respect to “upside risks to price stability”. The risk to growth is still “broadly balanced”. It is clear that the ECB focuses more on the uncertainty surrounding the Eurozone’s growth outlook. ECB head Trichet also referred to September to assess the situation with a pair of fresh eyes. If economic data keep coming in on the softer side, the ECB may well have to delay its tightening process.
HSBC Global Research