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Eco Focus is an aperiodic publication providing up-to-the-minute analysis of a current topic.
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.
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.
Jean de La Bruyère starts The Characters, his collection of philosophical essays. 320 years later, we face the same issue with helicopter money: everything has already been said about this potentially powerful central-bank tool. In this report, we do not claim to revolutionise the subject only to clear the air about the next potential monetary policy tool. We try to answer four basic questions: where does the 'helicopter money' idea come from? What are the different options conceivable? Is helicopter money legal for the ECB? To what extent is helicopter money effective?
The discussion in the March FOMC minutes aligns closely with Chair Yellen's cautious, dovish policy outlook. While a range of views was expressed in the minutes, and a couple Fed officials are ready to continue with rate normalization as soon as the April FOMC meeting, the majority view is to proceed more cautiously.
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.
Just three months have passed but the picture is now very different. Oil prices have plummeted, stock market prices have tumbled and the return to volatility and risk aversion and the flight towards quality have wiped out the gains made through December's actions. Our QE impact indicator continued on its downward trend in February.
The ECB announced an extension to QE by EUR20bn a month, and QE will now include some corporate bond purchases. It also cut its three rates (refi by 5bp to 0%, deposit by 10bp to -40%, lending facility rate by 5bp to 0.25%). In our view the main instrument is the announcement of a new round of TLTRO starting in June with favourable conditions.
The deal reached between the UK and the European Union on 19 February is the maximum that David Cameron might have hoped for, in our view. Not only does it legally recognise the special status of the UK within the EU and grant new opt-outs for the UK (crucially from "further political integration into the European Union"), it brushes the limits of the fundamental principles of the EU (such as the non-discrimination between EU citizens).
While the FOMC anticipates gradual adjustments in the stance of monetary policy it is by no means on a pre-set course and will respond to the incoming data. The Fed remains focused on the downside risks to growth from global turbulence.
The BoE left its monetary policy unchanged in February, in line with expectations. The decision was unanimous, making a change from the outcome of votes in previous months. The BoE made significant downward revisions to its growth and CPI inflation projections alongside its February Inflation Report, with inflation projected to remain below the 2% target until the end of 2017.
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