ECB: Awaiting clarity - Rabobank

ECB members have been relatively quiet over the summer period and returning from his summer break, Draghi stuck closely to his script at Jackson Hole, not revealing anything about future policy plans, explains the analysis team at Rabobank.

Key Quotes

“We believe he may have good reason to do so, since he doesn’t want to front run any other Council members in order to build as big a consensus as he can get for any QE changes.”

“Lack of clarity on QE sent the euro to new highs. The external risk-off environment, rendering EUR a safe haven, has further bolstered the EUR.”

“The Governing Council did not seem immediately worried about the recent EUR strength. Additionally, the same safe haven flows have depressed rates again, which should help offset some of the tightening in financial conditions from a stronger currency.”

“Either way, the ECB will have to make an exit shortly, and will have to orchestrate this in such a manner that financial conditions do not tighten too much. We continue to expect the ECB to try and achieve this by linking its forward guidance more to the rates policy.”

“Money markets have been developing correspondingly, with curves flattening further. Most of the residual implied risk of an early rate hike has been priced out. Indeed, seeing there have been no positive developments on the inflation front, the ECB may have to keep rates low for a, potentially, very long period.”

“Lack of clarity on QE has sent the euro to new highs. Whilst this may make the ECB’s job more difficult, a few Council members (albeit known hawks) have stated that they are not too worried about the currency’s strength, suggesting that this mainly reflects a better growth outlook.”

“Perhaps the most tangible policy comments came from Hansson, who suggested that the Council might want to seek more flexibility in its forward guidance (see page 2). This would be in line with our reasoning: an end of asset purchases requires the ECB to tie the easing bias to its rates instrument. Additionally, Hansson’s remarks suggested that the GC may try to frame the future impact of QE in terms of the stock of ECB holdings, rather than the flow of new purchases.”