21.10 Weekly Viewpoint : As widely expected, the ECB left monetary policy unchanged.

The ECB has declared it has not yet discussed what it will do with the purchase programme beyond March. Any decision has been postponed to December, when the estimates for 2019 will be released, and data may give more clues on the direction of the Eurozone economy…..

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Draghi has assured that a “sudden stop” of the APP is not contemplated, although there are no guarantees that he will manage to obtain sufficient consensus to extend the programme without a tapering of purchases.

As widely expected, the ECB left monetary policy unchanged. Officially, the Council did not even discuss the fate of the APP beyond March 2017, and simply acknowledged the work done to date by the technical committees, requesting further insight. At least, Draghi reassured that “ an abrupt end ” to bond purchases “ is not contemplated .” Formally, the ECB is waiting for the new staff estimates, which in December will include projections out to 2019.

For the time being, the assessment of the business cycle is confirmed: the recovery is continuing at a moderate but stable pace; inflation has risen by two tenths and will keep increasing in the next few months, fuelled by a favourable base effect. However, downside risks prevail for growth and inflation and Draghi emphasized the lack of upside pressures on domestic prices.

Therefore, the ECB confirms it intends to maintain the current ultraaccommodative financial conditions needed to guarantee a durable return of inflation to target.

However, Draghi was non-committal and did not answer questions on whether financial conditions depend more on the flow of purchases or on the stock of securities held in the ECB portfolio.

– The perception is that the Governing Council is rather split on the future course of action, and that requesting an opinion from the technical committees is a way to buy time. It is hard to believe that the Council does not have a clear picture of the technical options available to extend purchases, or that between now and December the economic picture will miraculously become clearer. Even in the event of data improving, risks to growth would remain skewed to the downside in any case as on the horizon ahead lie: an adjustment of trade flows to the sterling devaluation, a busy electoral calendar, and uncertainties on the economic situation in China.

Extending APP purchases at 80 billion euro per month for six more months would bring more benefits in terms of financial conditions and the stability of the area, than costs, in terms of the overheating of the economy and of the inflation trend. Furthermore, a period of inflation overshooting would be more than justified, after years at significantly lower levels than targeted, and this is the reasoned path chosen by other central banks. In the ECB’s case, however, the choices are notoriously complicated by the monetarist stance which, in spite of everything, still permeates the opinions of the German component of the Council.

In order to extend purchases at their current pace, and of government bonds in particular, the minimum yield rule would have to be changed, and not only. The ceiling imposed on the purchasable share of a single issue, and/or the capital keys rule governing purchases, should also be changed. While the former idea is not expected to meet with particular ideological obstacles, it would push German yields even deeper into negative territory.

In our view, a change of the capital keys rule would be less distortive and would afford greater credibility to the promise of reacting to any new deviations from the inflation goal.

The debate is by no means a simple one, and will not be helped by the recovery of inflation. Ultimately, the Council may agree on an extension of the APP until September 2017, although this outcome may be the result of a compromise which could imply more limited government bond purchases than at present, if not yet a ‘tapering’.

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