ECB does just enough to keep easing expectations alive – MUFG

Derek Halpenny, European Head of GMR at MUFG, notes that the euro is broadly unchanged as we expected with the ECB yesterday not really providing the markets with anything to go with as a macro trading theme.

Key Quotes

“The ECB did about just enough to keep the markets thinking that additional easing measures may well be announced at the next meeting on 8th September. The Brexit impact has been modest although he added that it was certainly a downside risk that had materialised.

But just like the BoE last week, the ECB’s main message was that it needed more time to make a full assessment of the fallout from Brexit. The updated ECB staff forecasts, available at the September meeting, will help the Council in their decision then. But President Draghi was willing to offer his view that it didn’t seem like Brexit had had any big impact on inflation. That certainly suggests no dramatic changes to the stance of the ECB going forward. But even a modest shift lower in inflation projections and risks would imply that the current stance of ending QE in March 2017 is not consistent with their policy objectives.

So we still expect the ECB to announce an extension of QE at the meeting in September and in doing so will also be obliged to announce some changes to the rules on securities purchases in order to expand the pool of securities available for purchasing that will certainly be required. There were no hints on what changes would be made but scrapping the exclusion of securities yielding less than the -0.4% deposit rate is a possibility as is increasing the single-issuance limit of 33%. We would be surprised if the ECB moved away from the capital key system that determines volumes from each country as this would be much more politically sensitive.

The meeting, as can be seen from the spot level, was pretty neutral for the euro. The advance PMIs released today in key euro-zone countries may prove more important given the data will be the first important evidence provided on business sentiment in the post-Brexit period. A bigger drop than consensus would certainly weigh on the euro today, especially seen as the contagion from Brexit is unlikely to have spread any further than Europe.”