ECB: Door to extension and parameter change is now clearly ajar – Rabobank

Research Team at Rabobank, suggests that the key message from ECB’s statement was that – as things stand – there is tacit acknowledgement that the ECB may have to stick to its purchase program for longer than its current official end date.

Key Quotes

“This was reflected in a (new) key sentence: “We will preserve the very substantial amount of monetary support that is embedded in our staff projections and that is necessary to secure a return of inflation to levels below, but close to, 2% over the medium term.” Under the assumption that it is quite unlikely that the ECB will be able to argue – come March 2017 – that this goal has been achieved, extension would seem inevitable. Note that the word ‘preserve’ also lends more support to ‘extension’ rather than ‘expansion’, although it does not reveal with which instruments this is monetary support should be preserved.

The second key message by Mr. Draghi was that the Governing Council has “tasked the relevant committees to evaluate the options that ensure a smooth implementation of our purchase program.” In the press conference, Mr. Draghi conceded that this was to ensure that “the measures from March can be implemented in the new constellation of interest rates” as much lower interest rates had “clearly restricted the eligibility universe.”

In other words, the ECB is now finally acknowledging that it is facing supply restrictions. Whilst substitute purchases may still be sufficient in the near-term, these comments clearly open the door to more detail, or even a decision, regarding the parameter adjustments as early as the October meeting. The minutes of today’s meeting will possibly provide some additional colour regarding how acute supply concerns are.

However, the key risk to succumbing to parameter adjustments whilst not answering the ‘expansion question’ in October is that the ECB – again – exposes itself to a drip feed approach that fuels speculation and/or uncertainty about its future intentions (“why are they not extending?”), exactly the thing the Governing Council would want to prevent. There are two solutions to this problem: either it reveals its full medium-term action and communication plan as early as October (we can’t rule that out), or it manages to postpone the ‘parameter question’ to December (our baseline), when new forecasts might warrant action.

One key question is whether the need to change parameters is seen purely to accommodate an extension or whether it is to address acute supply concerns. In case the former drove today’s decision to investigate, this strengthens the case for a December move.”