Global Daily – Banks report waning impact of ECB’s QE programme

by: Aline Schuiling , Joost Beaumont , Georgette Boele

Euro macro: ECB’s BLS survey shows declining impact of QE programme – The ECB published its Bank Lending Survey (BLS) for Q3 on Tuesday. The fixed part of the survey revealed that banks continued to ease lending standards on loans to non-financial companies, albeit at a somewhat slower pace than in Q2 (the net balance of tightened minus eased from -3 to -1). Banks also continued to report that loan demand by companies increased (the net balance of increased minus decreased rose to 15, up from 14 in Q2). The forward looking part of the survey revealed that banks expect to ease lending standards further in Q4, while they also expect a further rise in loan demand. These results of the BLS should strengthen the ECB’s confidence that the credit channel is functioning smoothly, and that it can start gradually slowing down its QE programme soon.

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Interestingly, the special ad hoc part of the survey probably adds to the ECB’s conviction in the upcoming changes in monetary policy. The BLS includes a number of ad hoc questions about the impact of the ECB’s expanded asset purchase programme (EAPP) twice a year, in Q1 and Q3. When comparing these two surveys for 2017, it appears that an increasing percentage of banks is reporting “has had basically no impact” to the questions whether the EAPP programme had an effect on the bank’s a) total assets, b) liquidity position, c) overall market financing conditions and d) profitability during the past six months (the average percentage increased from 66% in Q1 to 75% in Q3). Moreover, a rising percentage of banks answered “has had basically no impact” to the question whether they had used the additional liquidity arising from the EAPP programme for a) refinancing, b) granting loans and c) purchasing assets (the average percentage rose from 80% in 2017Q1 to 92% in 2017Q3). The answers to these questions suggest that the impact of the ECB’s asset purchase programme is waning. (Aline Schuiling)

UK macro: UK Q3 GDP growth higher than expected – UK GDP grew by 0.4% in the third quarter compared to the second quarter, according the first estimate. The outcome was slightly higher than the consensus forecast (0.3%), while it followed two consecutive quarters with growth rates of 0.3% qoq. On an annual basis, the economy grew by 1.5% in Q3 (same level as in Q2). The details (from the supply side) showed that the services sector was the largest contributor to GDP growth, with computer programming, motor trades and retail trade doing particularly well. Meanwhile, the contribution of the manufacturing sector to GDP growth turned positive again in Q3, after it was a drag on growth in Q2. Production in the sector was probably boosted by the past drop in sterling, which should have supported export growth. Finally, the construction sector continued to contract in Q3 (-0.7% qoq). Overall, the better-than-expected figures will probably strengthen the Bank of England in its view that the economy has remained on a path of solid growth, increasing the likelihood that it will hike rates next week. (Joost Beaumont)

Global FX: Sterling on the move – UK GDP came in better than expected. This has resulted in higher yields on UK government bonds and some upward adjustment in expectations about Bank of England rate hikes this year and next year. Therefore, sterling has risen across the board. EUR/GBP has declined below 0.89 and GBP/USD has risen above 1.32 again. The direction in EUR/GBP from here depends on the ECB meeting tomorrow and the Bank of England monetary policy meeting on 2 November. If the ECB were to be more dovish than expected tomorrow, EUR/GBP could drop to 0.885, while a more hawkish ECB will likely result in EUR/GBP moving back to 0.90. For next week, financial markets have almost fully priced in a rate hike by the Bank of England. If the Bank of England would not deliver, sterling will likely be beaten up badly. (Georgette Boele)