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The ECB did not officially extend QE, but they clearly pointed towards a change in the modalities over the near-term ("tasked the relevant committee"); we see it as a step towards an official extension in October or in December this year, along with an easing of purchase modalities, probably a removal of the deposit rate floor.
Highlights: What are the consequences of devaluations in the Caucuses and Central Asia? In Serbia, the outcome of elections came as no surprise. Saudi Arabia is faced with challenges as it abandons its rent-driven model. Mozambique discloses that it has hidden over USD1.3 billion of debt. South Korea experiences a bout of weakness. Brazil moves towards impeachment.
The ECB released the details about the CSPP. However, it will "be mindful of the potential impact of its purchases on market liquidity". We expect the ECB to purchase EUR4bn a month on average. Mario Draghi gave more details on other monetary policy tools. Above all, M. Draghi has fiercely defended the ECB's independence and reiterated the crucial need for governments to do more on structural reforms and growth-friendly composition of public finances.
We look back at the ECB's 10 March announcement, especially in connection with the TLTRO 2 operations and analyse their implications from the banks' viewpoint. This new programme should elicit more interest than TLTRO 1 and help to revive the transmission of monetary policy on lending interest rates. But this in no way guarantees its effectiveness in re-launching lending to businesses.
The ECB cut the deposit rate by 10bp, to 0.3%. It extended QE to March 2017 or beyond, if necessary. Those measures strongly disappointed the markets, which expected more QE or more of a cut. In our view this is the good amount of stimulus that is needed by the Eurozone: soft but prolonged accommodation.
Our Quantitative Easing impact indicator continued to edge down in October, following the virtually across-the-board deterioration in monetary and financial conditions observed over the summer. The monetary policy transmission channels that most immediately responded to the launch of the policy at the start of the year are those that have deteriorated most.
Yesterday's decision by the ECB to increase ELA, even incrementally, is a positive surprise in terms of timing and a supportive signal to Greece. On the crucial assumption that Greece remains a member of the Eurozone, the ECB should continue to do just as much as it takes to keep Greek banks afloat through a further carefully calibrated ELA lift (as well as potentially loosening collateral haircuts) starting next week.
We expect the ECB to stay the course at its 3 June policy meeting, insisting once again on its firm commitment to full QE implementation. New hints at QE flexibility would help the Governing Council adjust to more adverse market conditions in the future. While a 'rule-based' ECB has every reason to be strict with Greece, it is still unlikely to be the one cutting off liquidity to Greek banks.
2014 was a disappointing year for the Eurozone. The more upbeat expectations observed in late 2013 did not materialise in a recovery that has turned out to be more laboured than expected. The slight pick-up in activity in Q3 (+0.2% QoQ after +0.1% in Q2) did not radically alter the flat profile of activity since the spring. The forecast 0.9% growth rate for 2014 implies a new widening of the growth gap with the other large economies.
This is because the EMU area has shown considerable vulnerability to the drop in emerging-economy imports. The divergence in growth levels among EU member states has remained significant, despite the slowing of the core economies and a recovery in some peripheral countries. The underlying imbalances that are driving this divergence cannot easily be absorbed in a low-growth, low-inflation environment, and this will certainly remain true out to our forecasting horizon.
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