Via Goldman Sachs' Dirk Schumacher,
Bottom line: The ECB left its policy rates unchanged at today’s meeting and made no announcement of further non-conventional measures. The main innovation in today’s press conference was the shift in the language regarding the expansion of the ECB's balance sheet: an increase towards the size of its balance sheet at the beginning of 2012 is now “intended”, rather than simply an “expectation” of the Governing Council (as in the November statement). We read this as implying a higher degree of commitment to balance sheet expansion and thus as a further signal towards additional asset purchases. As made clear by ECB President Draghi, some members of the Governing Council remain sceptical about the introduction of further measures. An assessment of whether further stimulus is needed will be made “early next year”. Having emphasised that he does not need to achieve unanimity on the Governing Council to proceed with further easing (including purchases of sovereign debt), we expect Mr Draghi to announce and implement a sovereign debt QE programme during the first half of next year.
ECB to assess need for further measures “early next year”
The opening paragraph of the prepared statement included few – but noteworthy – changes. The Governing Council continues to expect the current measures to have a “sizeable” impact on the ECB’s balance sheet. The statement, however, now expresses the “intention” to increase the size of the ECB's balance sheet back to the level seen at the “beginning of 2012”. This implies a higher degree of commitment than the language used in the November statement, which had referred to an “expectation” that the balance sheet would achieve this dimension.
The prepared statement was also more specific about when the Governing Council would take a fresh look at the impact of the existing measures and their effectiveness: “early next year, the Governing Council will reassess the monetary stimulus achieved, the expansion of the balance sheet and the outlook for price developments” and “should it become necessary to further address risks of too prolonged a period of low inflation, the Governing Council remains unanimous in its commitment to using additional unconventional instruments within its mandate. This would imply altering early next year the size, pace and composition of our measures.” While we do not see this as an unconditional commitment to initiate further measures, it nonetheless reflects a general willingness among a majority of Governing Council members to expand the existing purchase programmes.
Downward revision of growth and inflation projection
As expected, the updated ECB staff projections showed a downward revision of the growth and inflation outlook for next year and for 2016. The inflation rate for 2015 is now seen at 0.7% after 1.1% previously, while the 2016 figure was revised down to 1.3% from 1.4% (GS: 0.6% and 1.2%); Mr Draghi confirmed later in the press conference that the inflation rate is seen at 1.4% by the end of 2016. The GDP forecast for next year was taken down to +1.0% after +1.6%. For 2016 the staff now expects growth of only +1.5% after +1.9% (GS: 0.9% and 1.4%).
Given the low level of the forecast for inflation, it is not surprising that the prepared statement stresses that a high degree of vigilance will be maintained regarding potential downside risks to price stability: “The Governing Council will continue to closely monitor the risks to the outlook for price developments over the medium term. …We will be particularly vigilant as regards the broader impact of recent oil price developments on medium-term inflation trends in the euro area.” Mr Draghi also highlighted the importance of recent sharp oil price declines in this context, on the basis that they increased the risk that inflation expectations could shift down and become incorporated into wage- and price-setting behaviour.
Preparing the ground
Today’s press conference – while clearly dovish in its overall tone – did not signal the same sense of urgency to address the downside risks of the inflation outlook as Mr Draghi’s speech to the European Banking Congress in late November. (This may reflect, at least in part, Mr. Draghi’s role at the monthly press conference of speaking “on behalf” of the Governing Council as a whole, whereas individual speeches reflect the personal view of each Governing Council member.)
During today’s press conference, Mr. Draghi made clear that unanimity in the Governing Council is not needed for further easing measures up to and including sovereign QE. But the “signalling effect” of sovereign QE would be more powerful if a broader consensus existed among the Governing Council. Building consensus behind sovereign purchases therefore may be valuable (and worth some further delay). Time will be an ally for Mr Draghi in this respect, as headline inflation is likely to remain close to zero in the coming months, and the ECB's balance sheet may even shrink as the 3-year LTROs mature in January and February. While this will not guarantee that all Governing Council members will ultimately approve a sovereign debt programme, the risk that the critics will undermine the credibility of the programme by voicing their concerns too aggressively should diminish.
It is probably also the case that some details of a potential sovereign debt QE programme still need to be worked out. When asked whether the ECB would have pari passu status for any sovereign debt purchases, Mr Draghi did not provide a concrete answer but simply said that the Governing Council would not implement any measures that would in the end lead to a tightening in financial conditions. But these details should be clarified sooner rather than later, and we continue to expect, barring a strong pick-up of the economy or inflation, a sovereign debt QE programme to be announced during the first half of next year.
While there is necessarily still a high degree of uncertainty at this stage, we would expect the programme to range between €500bn and €1trn, with purchases conducted according to the capital key of member countries at the ECB. There is also the possibility that other assets (corporate bonds, agency debt) will be included in the programme to ensure a high degree of flexibility in the implementation. However, given the focus on inflation expectations, in particular in an environment of declining oil prices – and the need to address the risk of a decline in expectations with forceful and credible action – we think that purchases of sovereign debt would be the main focus of the programme. It is less likely that a piecemeal approach will be taken, in which a programme for private or agency debt only is announced before a sovereign debt focused programme is implemented.
