Global Daily – ECB keeps wary eye on the euro

by: Aline Schuiling , Kim Liu

ECB view: ECB sees risk of unwarranted tightening of financial conditions – The account of the ECB’s July monetary policy meeting showed that the central bank is keeping a close eye on the euro exchange rate and financial conditions more generally. According to the account “concerns were expressed about a possible overshooting in the repricing by financial markets, notably the foreign exchange markets, in the future”. It was noted that a repricing across financial markets had taken place since the ECB’s June meeting, but that financial conditions had remained broadly supportive of the continued economic expansion. However, “the still favourable financing conditions could not be taken for granted, relied to a considerable extent on a continued high degree of monetary policy accommodation and continued to be seen as necessary for inflation to rise towards the ECB’s target”. Therefore, “there was a risk that financial conditions could tighten to a degree that was not warranted by the improvement in economic conditions and the outlook for inflation” and “it was generally judged paramount at this stage to avoid sending signals that could be prone to over-interpretation and might prove premature”. All in all, the accounts seem broadly in line with the view that the ECB is trying to achieve an exit from its QE programme without triggering a tantrum in financial markets. Therefore, its communication will likely remain cautious. Our base case remains that the ECB will begin tapering its asset purchases in January of next year and that it will signal the move at this September’s meeting. (Aline Schuiling)

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Rates Research: The covert yet sizeable ECB’s QE reinvestments – The ECB has started to reinvest maturing bonds under its PSPP programme since March 2017. Currently, these reinvestments are relatively small in size, but we expect that they will become more important, especially as the ECB will most likely taper its net asset purchases next year. Overall, we calculate that PSPP reinvestments could amount to some EUR 640bn during the next three years. They will be highest in sovereign bonds, followed by supranational, national agency and regional bonds. Germany will benefit most from the reinvestment, followed by Spain, Italy and the Netherlands. Portugal, Belgium and Finland will benefit the least from the reinvestments. Overall, however, we expect that the ECB will still be a dominant buyer in the eurozone bond market for the years to come, cushioning the impact of tapering (Click here for the full publication). (Kim Liu)