Our thoughts ahead of today’s ECB policy meeting and press conference were laid out in detail in the note (ECB: Balance sheet in focus). In light of the measures announced on 4 September, the ECB is unlikely to announce any new initiatives at this stage. Still, there are various issues likely to come up at the press conference which could be important signals as to the ECB’s appetite to do more.
One is the potential scale of the asset-backed securities (ABS) and covered bond purchase programmes. Leaks earlier this month suggested an unusually long period of three years for the programme, which would fit with the idea that the ECB needs ABS issuance to grow sufficiently to allow the purchases to be big enough. The ECB can provide some guidance on the assets it aims to buy, but what it ultimately buys will depend on how the market evolves. In the period since the preview was put together, press reports have suggested that there is still some disagreement between the members of the Governing Council as to which assets the ECB will buy. The disagreement seemingly relates to a proposal from the Executive Board to relax the eligibility requirements for lower-rated assets, according to people familiar with the matter. This would open the door to purchases of Greek and Cypriot ABS.
This type of disagreement is an illustration of the complications associated with central bank asset purchases in the euro area. It also reinforces the impression that the ECB has been running against the clock in sorting out the “modalities” of the ABS purchase programme andtherefore, there may be some gaps when the details are announced. Still, where there’s a will there’s a way and for a majority of Council members, there is a strong will to do more to ease the policy stance.
Another key issue will be the recent references by ECB President Mario Draghi to a rise in the balance sheet “towards the dimensions it used to have at the beginning of 2012”. He will be asked to be more precise in the Q&A session. Which reference point he has in mind – the level of EUR 2.65trn at the start of 2012 or the peak of EUR 3.1trn in July that year – could be very important in terms of gauging how far short of the goal the ECB might fall. The ECB’s take on the recent evolution of inflation expectations, measured via the five-year, five-year swap (Chart 1), will also feature in the Q&A, as will the assessment of the unexpected drop in the core rate of HICP inflation in the flash print for September earlier this week. The recent drop in the exchange rate is another hot topic.
