ECB Preview: Easing the pressure on PSPP - RBS

Research Team at RBS, suggests that while they continue to expect further ECB easing this year as core inflation fails to pick up and Brexit uncertainty takes a toll on growth (RBS economics has downgraded its Eurozone growth forecasts to 1.4% in 2016 and 1% in 2017), we do not expect cuts or accelerations in PSPP this week.

Key Quotes

“ECB observers will be looking for hints on potential alterations to PSPP design.

Referendum risk materialising, but ECB to wait for effects of TLTRO2

Draghi is likely to highlight the downside risks resulting from the result of the British referendum, while at the same time noting that immediate spillovers via the financial markets were limited, leading to the conclusion that for the time being the “Additional stimulus […] expected from the monetary policy measures still to be implemented” should be sufficient. TLTRO 2 still needs to kick in.

Bottlenecks are already emerging, as the ECB is forced down the curve

However, the strong performance in rates has left many bonds ineligible for PSPP – prompting speculation on when the ECB may run into bottlenecks forcing it to revise the rules it has set itself for the PSPP. Our analysis suggests that if the Bundesbank had bought all the eligible German bonds proportionally every day, it would run out of bunds to buy before the current end of QE in March 2017.”