09.09 Weekly Viewpoint : The ECB’s September meeting proved to be entirely interlocutory.

Admittedly, economic and market developments were too limited to justify changes to monetary stimulus. It is less encouraging that even the debate on possible alternatives to smooth technical problems in the PSPP ‘s implementation was postponed to a future date………

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Expectations were not particularly high ahead of yesterday’s ECB meeting, but the tones used in the statement and during the ECB press conference proved to be even less constructive than forecasted. For the time being, focus will stay on implementing the March package, of which the Council and President Draghi stressed the effectiveness in terms of monetary policy impulse transmission. Draghi said that the Council did not even discuss a possible extension of the life of the APP to beyond March 2017.

The only opening compared to last July was that the ECB has instructed the relevant committees to “evaluate the options that ensure a smooth implementation of the purchase programme”. The debate on the operational features of the APP would in any case become inevitable in the event of an extension of the programme to beyond March 2017, as under this scenario not even removal of the rule by which the yield of a purchasable asset must be higher than the deposit rate would be sufficient (on this topic, see Interest Rate Strategy of 07/09/2016). However, this debate will soon be required even if the programme is not extended: given the PSPP’s current implementation parameters, the ECB will be faced with mounting shortage constraints on some markets even before the current programme deadline. As the emergence of shortage issues had been envisaged ever since the launch of the programme, and the ECB will have surely conducted internal analyses on the operational options to be adopted, this need for further consideration probably reflects deep and still unresolved internal splits on the scope and future of the APP.

The postponement of new monetary policy announcements is fully justified by a forecast scenario that is essentially unchanged compared to the one drawn up in June, and came as no surprise to most commentators. The new staff forecasts lowered 2017 growth by one tenth only, to 1.6%, and raised this year’s expected rate to 1.7%. Inflation forecasts were only marginally touched down. However, we believe the ECB’s growth outlook may prove optimistic, and should indications come in the next few months of a slowdown in the employment and consumption trends, the Council would have reason to step up monetary stimulus. An intervention on rates seems unlikely, although Draghi upheld negative rates as an effective tool in loosening monetary conditions. The increase in monetary stimulus is more likely to take the form of an extension of the life of the APP, and will therefore require a political debate within the Council on the parameters governing the programme – and possibly also on the capital keys rule. On this front, resistances will in all likeliness be very tough to overcome. Despite the decision to leave most of the risk tied to asset purchases with the balance sheets of the national central banks, the problematic allocation rule is considered by the President of the Bundesbank as essential in preventing monetary policy from becoming subordinated to fiscal policy, to assure that monetary policy is for the whole of the euro area, and to protect the independence of the central bank

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