ECB: All important decision awaited – BBH

Research Team at BBH, suggests that it does not appear that the ECB is prepared to announce a decision about whether it will extend its asset purchases after the current soft end date of March 2017, or about how it will address the potential scarcity of particular securities. 

Key Quotes

“Although we thought there was an opportunity to do so last month, it now seems more likely that the ECB will make its decision at the December meeting.

In addition to giving it more time see the impact of its current policy setting, it will also have new staff forecasts, which Draghi seems to prefer. The updated forecasts are helpful in stealing some thunder from his critics that often make it sound as if Draghi's commitment stems from his national origin rather than "objective" economic analysis.

Draghi will likely be pulled in at least two directions at the press conference.  One set of questions will likely address the tapering story.    Draghi was clear at the last meeting, saying the issue was not discussed.  More information will be sought amid suspicions that the ECB President was disingenuous. 

However, Draghi indicated before and will likely restate that the asset purchases should not end abruptly.  This implies some kind of tapering process.  It does not say anything about when the asset purchase program will end of when the tapering begins or the pace of tapering.    At this juncture, our best guess is that one way or the other, the ECB will be expanding its balance sheet most if not all of next year.   

Another set of questions will likely revolve around the capital key.  To avoid appearances of favoritism, the ECB  buys assets in proportion to the economic size of its members.  There is a concern, seemingly higher among some market participants than policymakers that shortages are emerging that could threaten the program.  Those shortages will become more acute the longer the purchases continue.

The less disruptive and, perhaps, the easiest to reach an agreement on, seems to be to ease self-imposed rule of not buying a security that yields lower than the minus 0.4% deposit rate.  The concern here is a forcing a national central bank to realize a loss.  However, instead of a narrow security-by-security imposition of the rule, it really needs only apply to the portfolio as a whole, or the average yield of the bonds purchased.” 

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