The ECB kept policy on hold, but kept the door open to ease policy further if necessary. We expect a further step-up and extension of the QE programme in the second half of this year.
- The ECB kept policy hold in April, which was no surprise following on so soon after the March stimulus package; ECB President Mario Draghi said the March measures had led to an improvement of broad financing conditions.
- Nevertheless, the ECB kept the door open to ease policy further if necessary, saying the risks were tilted to the downside and the Governing Council was ready to use all instruments in its mandate.
- This will not include helicopter money any time soon as Mr Draghi said the ECB had not discussed this policy and that it was ‘fraught with operational difficulties’ though he did not rule it out completely.
- The ECB President hinted at three potential triggers for further action: the emergence of second round effects on inflation from the current lowflation period, an unwanted tightening of financial conditions or the materialisation of global risks.
- We think the ECB will probably need to do more as inflation is still set to undershoot its target for a long time and the recent easing of domestic financial conditions will likely not be sufficient to change this picture especially since the euro has risen.
- However, we do not think further monetary stimulus measures will come until the second half of the year (likely in September). This reflects that two of the main measures it announced (the TLTRO II and the corporate sector purchase programme) will not even be implemented until June.
- We think that eventual further easing will take the form of a step up and extension of QE. Although we think further modest deposit rate cuts are possible, this step may only be taken if there is a significant uptrend in the euro.
- The details of the corporate sector purchase programme (CSPP) suggest the eligible universe will be relatively broad. The purchases will be subject to risk sharing and the distribution will be based on market capitalisation rather than the capital key. This implies countries with large corporate bond markets will see more purchases.