ECB to leave options open – MUFG

Derek Halpenny, European Head of GMR at MUFG, notes that the euro remains broadly stable around the 1.1000 level ahead of today’s ECB meeting with President Draghi likely to express continued concern over weak inflationary pressures.

Key Quotes

“One big issue that will certainly be addressed in the Q&A today will be the shortage of securities available for purchase given certain constraints set out at the start of QE.

That shortage will have to be tackled at some point especially if the ECB today hints that QE is likely to continue beyond the current deadline of March 2017. Increasing the single-issue limit from the current level of 33% is one option as is scrapping the exemption of buying bonds yielding less than the -0.4% deposit rate. These two options are certainly more politically appealing than abandoning the capital key system for purchases in favour of say debt market size – a measure we do not expect the ECB to adopt.

We don’t see a big move for the euro today. Expectations of action are low and if the ECB was to signal an extension of the March 2017 deadline, the reaction is likely to be muted given the ECB has always stated the program could be extended. The ECB is also likely to argue that more time is required to assess the actions already taken. The Bank Lending Survey, released on Tuesday, included a question on the new TLTROs and the ECB will no doubt highlight today that the responses suggest that this new TLTRO program will have a positive impact on new lending volumes.”