fra Commerzbank:
At the first meeting after its QE decision – and only few days ahead of the actual start of government bond purchases – we believe the ECB Council will adopt a wait and see policy. Higher growth projections also support this view. By contrast, still-low inflation expectations are likely to provide a headache for the Council. Waiting for QE to show its effect
At the press conference after the ECB Council meeting in Cyprus, President Draghi – in line with current statements from Council members – is likely to stress that the QE programme is “openended”. By doing so, he will keep alive market speculation of further measures. However, he is also likely to emphasize that the purchases starting in March will first have to show their effect – and thus take a “wait-and-see” stance.
Further QE details One cannot rule out that Draghi may announce further details of the QE programme right before the start of government bond purchases. For instance, ECB Executive Board member Praet had signalled that not only potential losses but also potential gains will remain with the national central banks in 80% of all purchases. And ECB Vice President Constancio indicated that the national central banks might return the government bonds they bought – through securities lending, for instance – back to the market. This would reduce the risk of the market drying up.
Finally, the ECB could provide more precise information as to what kind of agency bonds it intends to buy. Higher growth projections… ECB Vice President Constancio has already signalled that the central bank is likely to make upward revisions to its growth projections (table 1). This also argues for the ECB to wait and see for now. By contrast, the 2015 inflation projection is likely to be slashed once again, owing to much lower oil price assumptions. ECB Executive Board member Praet had explained repeatedly that euro zone inflation was only likely to return into positive territory later in 2015.
As a result of the lower oil price assumption it is difficult to tell from the projections what increase in inflation the central bank experts are looking for as a result of QE. In this respect, we will need additional explanations from ECB President Draghi at the press conference. …but inflation expectations more of a disappointment Market-based inflation expectations are likely to provide a headache for the ECB Council, increasing only on the days before the latest Council meeting, just to fall again thereafter. So far, the ECB’s hopes that inflation expectations would rise on the mere signal that it will buy bonds on a large scale have not been realised. If this continues to be the case in the longer term, the ECB might increase its purchase volume once again. Greek banks likely to remain dependent on ELA We understand that the ECB Council will not decide before the Council meeting on Thursday whether Greek government bonds will again be accepted as collateral for ECB repo transactions. Obviously, the ECB believes that the extension of the Greek aid programme does not guarantee its successful conclusion. However, the ECB Council is likely to prolong the provision of Emergency Liquidity Assistance (ELA) by the Greek central bank, not least due to the ongoing risk of a capital flight. TABLE 1: ECB likely to increase its growth projections Commerzbank forecasts for March projections of ECB staff experts, December projections of Eurosystem staff experts in brackets 2015 2016 2017 Growth 1.3 (1.0) 1.7 (1.5) 1.8 (–) Inflation -0.1 (0.7) 1.2 (1.3) 1.6 (–)
