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The ECB press conference has been in line with expectations: Mario Draghi only gave us a rendezvous in September, when the ECB will publish its new macroeconomic projection and when the consequences of Brexit on the Eurozone will be clearer. We agree with the ECB that the Eurozone does not need an acceleration of monetary easing and that the Brexit does not change things dramatically. We maintain our view that the ECB will extend QE by six months and that it will be announced in September. This extension will probably come with an easing of the purchase modalities to face the bonds scarcity.
In the current conditions, the ECB will face a shortage of bond before the end of this year. We think that Eurozone economic conditions will encourage the ECB to extend QE until at least September 2017, and the basic conclusion to that is that the ECB will have to change its PSPP. Several options are possible – and in reality the PSPP already has enough flexibility to address this shortage: the ‘substitute purchases'. However, while these substitutes appear sufficient to address the shortage of bonds from small countries, things may be more complex where Germany is concerned (and the Netherlands soon after). We do not think that the ECB will let the flexibilities come into force for Germany without making a formal decision about it, and we see the dropping of the capital key as highly complex politically. Scrapping the deposit rate limit appears to be a better option, even if it could push short-term sovereign rates way lower and then pose difficulties for money-market funds – beyond distorting the market further in unchartered waters.
The ECB's QE started in March 2015; 15 months later it was widened (inclusion of corporate bonds and sub-sovereign bonds), increased (to EUR80bn per month) and extended (until March 2017 or beyond if necessary). Other changes are possible, and we think that at the very least QE will be extended until September 2017 – or beyond.
The British referendum on the 23th of June resulted in a vote to leave the European Union, with 51.9% of votes in favour of 'Leave'. The details of the results show an extremely divided UK, highlighting the strong likelihood of a dislocation of the country if a 'Brexit' really happens. The political crisis is set to prevail in the coming months, as is the uncertainty over the future of the country and its relationship with the EU. This will undoubtedly weigh on confidence and economic growth in the UK in the near to longer term.
"...what changes...is that if structural reforms are in place, the time that it takes to reach this objective is smaller, is shorter”. The ECB did not change its monetary policy stance, it reaffirmed its confidence in its tools to support the Eurozone economy but, once again, it insisted on the need for other policy areas to act.
As we went to press in March, the European Central Bank had just announced that it was stepping up its quantitative easing policy. But, thanks to our QE impact indicator, we can already observe its initial effects on monetary and financial conditions.
Following our report "TLTRO II in five questions", we continue our series of technical publications on the ECB. At first glance, the EAPP (expanded asset purchase programme) is a simple quantitative easing programme, and the 2008 crisis taught us what a QE programme is. However, as always as far as the Eurozone is concerned, things are a little bit more complex.
FOMC voters want to keep their options open for raising rates in June. They seek to "maintain the flexibility to make this decision based on how the incoming data and developments shaped their outlook for the labor market and inflation as well as their evolving assessments of the balance of risks around that outlook." Fed officials generally saw the Q1 growth slowdown as temporary and noted that labor market conditions continued to strengthen while inflation continued to run below the 2% objective.
On 10 March 2016, the ECB announced a second series of TLTRO with easier conditions than the first series. At the four quarterly operations (from June 2016 to March 2017), banks will be able to borrow for four years at a rate between -0.4% and 0%, depending on their lending to the private economy.
The FOMC maintained its current monetary policy settings today, in line with market expectations. Neither the 0.25% to 0.50% Fed funds target range nor the Fed's current portfolio reinvestment policies were changed. The discussion in the March FOMC minutes and subsequent comments from Fed officials pointed to little chance of policy move in April.
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