Newton IM: ECB’s Governing Council

The ECB’s Governing Council is meeting tomorrow to decide what it intends to do with its €1.7 trillion asset purchase programme. ….

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Von Jon Day, portfolio manager in the fixed income team at Newton Investment Management

“We are not expecting any major change in ECB policy this week, but Mario Draghi may give signals as to some of the tweaks that will be made at the December meeting.
The ECB’s problem is that they are nearing their self-imposed limits as to the amounts of bonds they can buy. Currently they can’t buy bonds with a yield lower than the deposit rate (-0.4%) (this rules out all German bonds up to 2023 maturities), bonds longer than 31 years or hold more than 25% or 33% (depending on the bond’s documentation) of a bond issue.
All these limits could be relaxed to give the ECB more time to continue its quantitative easing programme.
Although headline inflation has started to rise in the Eurozone, core inflation has stayed between 0.8% and 1%, well below the ECB’s 2% target.  Bank lending growth is also now back to positive albeit still at very low levels, but things are slowly improving although they are not enough for the ECB.
The ECB believe that to stimulate growth and increase inflation expectations yields across the curve need to be as low as possible, to ensure funding costs are as low as possible. They have recently noted that their actions have not yet affected bank profitability and that they are setting rates for the whole of the Eurozone economy, not specific sectors or countries.
The ECB’s likely next move is to maintain policy or loosen further to ensure the slow improvement in the Eurozone continues.”