Global Daily Insight – ECB report cools QE hopes

by: Nick Kounis , Maritza Cabezas

Global-Daily-Insight-21-October-2015.pdf (220 KB)
  • Robust ECB bank lending survey leads to some scaling back of QE hopes…
  • …report was more mixed than headlines suggest, and further ECB stimulus still looks likely
  • No hints from Fed officials on rate hike, while markets remain unconvinced of rate hike this year


ECB Bank Lending Survey holds back equities and bonds

A relatively robust ECB Bank Lending Survey triggered some scaling back of expectations that the central bank would step up its QE programme in the coming months. This led to a typical reversal of the QE-trade, with Bund and equity prices falling in unison and the euro firming. However, the moves were not really large.

BLS report was robust, but some soft spots

The ECB’s Bank Lending Survey was certainly consistent with an ongoing economic recovery, which is in line with our base case scenario. However, there were also some soft spots. Granted banks continued to ease credit standards on loans to companies  (-4 in Q3 vs -3 in Q2) and on consumer credit (-3 in Q3 vs -4 in Q2), but they tightened credit standards on mortgages (+5 vs -9).

Demand for loans rising, but at a slower pace

At the same time, although corporate demand for loans accelerated, the pace slowed for mortgages and consumer credit, albeit from high levels (see chart). That might be consistent with some easing of the momentum in the pace of economic recovery. The rising demand for bank loans from companies was partly driven by investment needs, inventories and working capital, but also some other factors, such as the low level of interest rates, debt refinancing and M&A activity.

QE seen as helping to ease credit standards

The ECB also added a special question on the impact of QE. The additional liquidity was reported to have partly been used to step up bank loans, while it also had a net easing effect on credit standards.

A stepping up of QE still looks likely

Despite signs that the economic recovery is continuing, we still think that the ECB will step up QE (most likely in December) given the likelihood that inflation will otherwise under-shoot its inflation target over the medium term. The ECB’s confidence that QE is having a positive impact, could also be seen as showing that this is a tool that is working, and therefore encourage the central bank to continue to use it.

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No hints from Fed officials on rate hike in latest speeches

Fed officials are split, with some putting more weight on the consequences of too early tightening, while others are more concerned about being behind the curve. The most recent interventions from Fed officials are not giving a clearer picture. The President of the Federal Reserve Bank of San Francisco, John Williams, declined to say when he saw the appropriate timing to begin interest rate normalization. He mentioned that ‘with good arguments for and against raising rates’, the decision remained a ‘close call’ for him. Meanwhile, Fed Chair Yellen and Governor Powell shed no light on policy in remarks on Tuesday. All of a sudden it has gone remarkably quiet at the Fed.

Markets still unconvinced of rate hike this year

The Fed has two scheduled policy meetings this year, in late October and mid- December. Futures markets now see a 6% probability of a  rate hike in October and a 32% probability that the Fed will move in December. Soft retail and labour market reports are not giving markets the confidence they would want to speculate on a rate hike this year. Meanwhile, housing data released on Tuesday are pointing to a moderate recovery of the housing market. Housing starts were stronger than expected in September (6.5% was -1.7%), after two consecutive declines in Q3. Building permits were, however, subdued (-5% after 2.7%).