ECB Minutes Are A Dud, Fail To Excite Markets

For all the excitement surrounding today's ECB minutes release, they turned out to be a dud, with the EURUSD failing to move even 10 pips, and Bund yields largely unchanged. Contrary to expectations, the minutes did not disclose anything new, instead echoing what Peter Praet said on Monday.

Of note, the minutes revealed that ECB officials discussed various options to recalibrate QE at the September policy meeting, a recalibration which should proceed in very gradual, cautious manner. And, as Reuters had noted previously, ECB officials "disagreed" on reasons for recent Euro appreciation.

Digging through, the minutes also noted that the Governing Council members had a “preliminary exchange of views about the future monetary policy stance and the considerations that might guide a recalibration of instruments and the transmission channels through which they shape financial conditions and the outlook for price stability,”

Hinting at the upcoming taper, “A view was put forward that conditions were increasingly falling into place that would allow the intensity of monetary policy accommodation to be adapted and would provide an opportunity to scale back the Eurosystem’s net asset purchases.” At the same time, officials were in “broad agreement” that substantial policy support was still needed.

Confirming the confusion over how to tighten, officials discussed “some general trade-offs inherent in various scenarios for the future recalibration of the APP and, in particular, the choice between the pace and the intended duration.” Furthermore, “benefits from a longer intended purchase horizon, combined with a greater reduction in the pace, were compared with those from a shorter period of purchases and larger monthly volume.”

Policymakers also expressed concern about speed of recent euro appreciation and exchange-rate volatility, even if, as noted above, they could not agree on what had caused it.

Separately, the Minutes noted that the third priority for the ECB's forward guidance was the Euro, emphasizing that: "the recent volatility in the exchange rate represented a source of uncertainty, requiring close monitoring with regard to possible implications for the medium-term outlook for price stability"

"More generally, the point was again made that the overall degree of accommodation was determined by the combination of all the monetary policy measures deployed by the ECB and that the Governing Council’s assessment of progress regarding a sustained adjustment in the path of inflation should apply to the overall design and direction of the ECB’s monetary policy stance as a whole, and not with reference to any particular instrument in isolation, such as the duration and pace of APP purchases."

In other words, if and when the EURUSD spikes or tumbles, the ECB vows that it will rush right in to mitigate any volatility, in hopes of avoiding said volatility in the first place. No surprise then, that the EURUSD is unchanged on today's minutes.

Separately, ECB board member Benoit Coeure discussed volatility in asset purchases for individual countries in the Sept. 6-7 policy meeting, focusing on the recent debate whether the ECB was actively deviating from its capital key. Coeure recalled that ECB has some flexibility in implementing QE. As the minutes clarify, the ECB decided to spread reinvestment of proceeds from French bonds maturing in July 2017 over several months, which temporarily caused a decline in share of French bonds in net purchases and a perceived over-allocation for other countries. “This outcome had been misinterpreted by some market participants as an active policy choice by the ECB, which was not the case.” 

The discussion is meant to address debate over the ECB's deviation from its capital key limits, although should the ECB continue QE at its current pace, diplomatic explanations will not work very soon as - without any notable changes to the QE program - the ECB will soon run out of eligible Bunds to monetize.