Draghi dropped plenty of hints that the Governing Council was preparing for more easing. We expect another package of measures to be announced in December, including an expansion of the ECB’s bond purchases to investment grade corporate bonds. The easing mode should keep core bond yields anchored at low levels, contribute to narrowing spreads in the Euro-area bond market and keep the euro under pressure.
This meeting was clearly about building credibility that the ECB stands united after the recent media reports of a revolt inside the Governing Council. The December meeting will be about action again. Draghi repeated time and again the unanimity behind the statement and the preparedness to take further action.
The balance sheet target is now official, as it was brought into the statement, and thus enjoys the backing of the entire Governing Council. Draghi sounded very committed to reaching this target.
The statement also said 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, while Governing Council will closely monitor and continuously assess the appropriateness of its monetary policy stance. Draghi added the staff is working fast, implying its work should be available for the next meeting.
Draghi continued to sound optimistic about the measures already taken, and the statement said with the measures that have been put in place, monetary policy has responded to the outlook for low inflation, a weakening growth momentum and continued subdued monetary and credit dynamics. Still, the very subdued inflation outlook, another round of downward forecast revisions in December, and possibly a further drop in inflation expectations also in the Survey of Professional Forecasters point to more action in December.
Expanded purchases ahead
Draghi elaborated that their more exact balance sheet comparison is March 2012 after the second LTRO. This means an increase of almost EUR 1000bn from current levels, and taking into account the remaining 3-year LTROs, the new measures would need to amount to some EUR 1200-1300bn.
Even though the ECB has gotten to a relatively brisk start with its covered bond purchases, the first two weeks of purchases still amounted to around EUR 5bn. We do not share Draghi’s optimism that the measures announced so far would come even close to bringing the ECB to its balance sheet target.
Expansion of the purchases thus looks to be ahead already at the December meeting. We expect the ECB to include at least investment grade corporate bonds, possibly also agency and supranational bonds. An important question will once again be the ECB’s willingness to tolerate credit risk. Especially if it continues to shun risk, this may not be the last time the ECB has to expand the universe of its purchases.
In addition, the ECB will likely once again try to make the TLTROs more attractive by removing the 10bp premium and possibly increasing the maximum amount banks can borrow through the operations.
QE trade live and kicking
Draghi’s message should leave the market free to continue to price in more easing. This means depressed core bond yields, tighter intra-Euro-area spreads and a weaker euro. As far as spreads are concerned, we favour Italian bonds to Spanish ones in the near-term due to the uncertainty over the Catalan question, and Dutch and Austrian bonds to Finnish ones due to the weak Finnish economic outlook.
Nordea