RBI governor Rajan, when not being taken to task by a tie-less Bernanke, recently railed against QE spillovers. Most pertinently he said (with our emphasis):
By downplaying the adverse effects of cross-border monetary transmission of unconventional policies, we are overlooking the elephant in the post-crisis room. I see two dangers here. One is that any remaining rules of the game are breaking down. Our collective endorsement of unconventional monetary policies essentially says it is ok to distort asset prices if there are other domestic constraints to reviving growth, such as the zero-lower bound. But net spillovers, rather than fancy acronyms, should determine internationally acceptable policy.
Otherwise, countries could legitimately practice what they might call quantitative external easing or QEE, whereby they intervene to keep their exchange rate down and build huge reserves. The reason we frowned on QEE in the past is because we believed the adverse spillover effects for the rest of the world were significant. If we are unwilling, however, to evaluate all policies based on their spillover effects, there is no legitimate way multilateral institutions can declare that QEE contravenes the rules of the game. Indeed, some advanced economy central bankers have privately expressed their worry to me that QE “works” primarily by altering exchange rates, which makes it different from QEE only in degree rather than in kind.
We wonder if, after a brief blaze of real scrutiny, people have started to look past the imposition of a negative deposit rate by the ECB in favour of the more seductive and mysterious ECB QE and how it might be constructed. And we wonder if that is something of a mistake.
How a move to negative is constructed will, of course, have much to do with what it is intended to achieve — a weaker euro at last check — but we also can’t help but think it would be cool to make sure it won’t cause too much harm either. Herein lies a plan. Read more
Unanimous in its commitment to using also unconventional instruments within its mandate in order to cope effectively with risks of a too prolonged period of low inflation…
– Mario Draghi, April ECB press conference
Don’t try saying that with a mouthful of peas.
More seriously, spot the caveats. A few members of the ECB governing council have since added to the noise around ECB QE — Nowotny, Mersch, Constancio, Coeure and Weidmann — but we feel better no informed than when the presser ended on Thursday. Read more
Ebbing, one month at a time. (Via Eurostat’s March flash estimate)
37 minutes of Ireland’s Doctor Doom. Read more
We know who he is, we just don’t get what he’s doing. He does so like confounding expectations on his island of stability.
This time with inflation at 1 per cent there was a belief that Draghi would make some sort of compromise gesture while keeping rates on hold, even if it amounted to SMP tokenism. But, nope, he disappointed… despite the ECB’s own 2016 inflation forecast coming in well below 2 per cent. Doing nothing in the face of that isn’t exactly reassuring — it’s a lot easier to fight deflation risks than the real thing. Read more
To QE or not to QE remains the question. Comfortingly, just about everybody is united in uncertainty.
Here’s JP Morgan (our emphasis throughout):
Our own expectation is that the ECB will simply stay on hold for a very long time (at least until late 2016). If correct, it would make the coming months and quarters very uncomfortable for the central bank and it may not take much more of a disappointment in the data to trigger a small policy change. We are open-minded about this. But, unless the outlook changes very significantly, we think that any policy change will be a token gesture, rather than something substantive.
BNP Paribas: Read more
Actually, it’s a €1.5tn question… at least according to SocGen. But it’s not very clear if that matters considering the barriers to euro area QE are so high.
We don’t suppose the killer argument in favour will be that “an ECB QE programme of €1.5 trillion could lower the 10y Bund yield by 100bp, pushing it down close to the 10y yield of JGBs (0.6%)”, though it’s worth a shot. There might be more mileage in pushing the Dax angle. Read more
Just how much would tickets go for at a German Constitutional Court hearing into any future quantitative easing programme by eurozone central banks… if a €1tn programme could easily buy a fifth of German bonds in a year?
Buy equities said man owning equities. Maybe buy loans hinted man at the ECB:
We think that a revitalisation of a certain type of ABS, a so-called plain vanilla ABS, capable of packaging together loans, bank loans, capable of being rated, priced and traded, would be a very important instrument for revitalising credit flows and for our own monetary policy… Read more
Arguably, none of the below matters now.
That’s the prime effect of the German constitutional court turning to the European Court of Justice for a ruling on whether the ECB’s sovereign bond-buying programme is a “structurally significant transgression of powers” under European treaty law.
Big words. But the backing of the Bundesverfassungsgericht judges (pictured right) for that view gets rendered into just another opinion, pending the ECJ’s decision. And the arc of the ECJ’s justice is long, turgidly written, but ultimately quite friendly to pieces of bailout architecture that have an odd relationship to the treaties — as in past musings on the ESM.
But the really interesting thing is that regardless, the OMT’s purpose apparently remains almost completely lost on the court. Read more
Just in case Draghi actually, finally, opts for negative rates later today and puts us all out of our misery, Deutsche Bank’s George Saravelos has taken a stab at how big a hit the euro would take (with our emphasis in the last paragraph): Read more
Now vs 2009 that is, when a brief flirtation with deflation in the eurozone proved short lived and provided ammunition for those who deny a Japanese-style outcome–back then the headline inflation rate dropped to -0.6 per cent in July 2009 but was negative for only five months and rebounded to +1.7 per cent only a year later.
However, as we await for the ECB to act or not later in the week, Capital Economics’ Jonathan Loynes took the time to note there are good reasons to think a new bout of deflation could be both longer- lasting and more pernicious than the last one (with his emphasis):
Citi’s research team highlights the important point that Germany’s Bundesbank has signalled that it is open to an end to ECB sterilisation operations.
The move follows consecutive failures by the ECB to sterilise its bond purchases in the last month.
As the Citi analysts note, the failures potentially indicate funding pressures in the Eurozone, following the removal of a lot of excess liquidity from the system:
with the ECB failing to attract sufficient bids for its liquidity absorbing 7-day fixed-term deposit, sterilisation is not functioning as well as intended, with investors preferring to keep hold of some funds as the excess liquidity position dwindles. We suspect that the ECB could soon announce that it will suspend sterilisation at least until July 2015, during which period the ECB has committed to full allocation fixed rates for the 7-day MRO. Alternatively, the Governing Council could decide to lower/abolish minimum reserve requirements (last change from 2% to 1% in Dec-11) in order to tackle the recent increase in overnight interest rates that runs counter to its very accommodative monetary policy stance.
Is this contrarian? The argument from JPM is that the long awaited German Constitutional Court ruling on the ECB’s untested Outright Monetary Transactions might actually buttress the credibility of the OMT, rather than undermine it. Read more
First, rewrite history (as Aufhebung). Read more
OK, one country can print in its own currency, while the other can’t. There is also no suggestion of an intimate circle of support in the US by which banks and the government prop each other up (as that’s what the Federal Reserve is for).
But after the FT’s story that the ECB is poised to get tough on Sovereign Bond Risk, an interesting chart arrives from Huw Van Steenis and the Morgan Stanley banks team: Read more
Consider this chart from Morgan Stanley:
And then this from Barc: Read more
Yup, we’re back here again. Here’s how Credit Suisse ranks the ECB’s options if, or when, the increasingly dovish governing council decides that more easing is necessary:
The first option comprises exhausting the ECB’s standard policy lever by cutting rates further. We expect this to be the first response if more needs to be done and could be prompted by inflation falling to 0.5% y/y or lower. A further cut in the key policy rate would also entail taking the deposit rate into negative territory.
Two tables below the break, courtesy of Credit Suisse, detailing the ECB board’s easing predilections. Tabled story short, the increasing north/south divide that has accompanied the euro area’s drawn out crisis has lead to the balance of power shifting to the periphery. Or: doves in the ascendant. Interesting too that the Bundesbank might thus be pushing for ECB minutes to be released in order to quell those national interests.
Out of the 23 Governing Council members including 6 Executive Board members 13 are dovish or very dovish as we show in the table below, where we have assessed Governing Council members and their recent statements. The dovish cause of the periphery is further helped by the fact that three core representatives, both French nationals and the governor of the central bank of Belgium, have also been typically perceived to be in the more dovish camp. Increasingly the Bundesbank is thus becoming more marginalized which might explain the Bundesbank having consistently increased the volume of its verbal interventions throughout the crisis.
Icap’s Chris Clark alerts us on Friday to the fact that European liquidity markets are already preparing themselves for a potential liquidity squeeze come the end of the year.
As he notes:
Month-ends have become increasingly significant events for the Eurozone repo markets over the second half of this year as levels of excess liquidity have diminished and market rates have slowly edged higher. This Thanksgivings Day/November month-end liquidity hump has proved a tricky one for the market to manoeuvre, but already attention is focusing on the impending year-end as evidence stacks up to suggest funding might be problematic for some.
Presenting Italy, a central plank in the argument for a new vLTRO or at least an extension of what we already have:
Have an expansive ECB toolkit courtesy of Deutsche (click to enlarge):
On that note, here’s Reuters on Wednesday:
The European Central Bank is considering a new long-term liquidity operation available only to banks that agree to use the funding to lend to businesses, a German newspaper reported on Wednesday, citing sources.
The ECB cut rates unexpectedly on Thursday. While there was market consensus that easing was coming, there was little agreement on the form in which the easing would take place. A cut was seen as stifling the ECB’s future flexibility by taking it to the lower bound and flirting dangerously with negative rates, while further LTROs were seen as potentially constrained by AQR-related stigma.
But the big news from Draghi’s press conference, however, is that the ECB is clearly not afraid of the former, and not necessarily scared of the latter either.
The ECB ended up cutting the main refinancing rate by 25 basis points, whilst reconfirming its commitment to fixed-rate tender full allotment in its MROs and special term refinancing operations, and its three-month LTROs. Read more
Despite the few who got it right that the European Central Bank would cut on Thursday (including this guy)… Deutsche sort of got their reaction in early.
Well, we say reaction, the FX team indicated that might raise a languid head in the direction of the market if something happened. It’s still worth noting post-announcement: Read more
Update – It’s not just the rate cut, as Mario Draghi opens the presser at pixel time:
Earlier – Bold move or way too late? You decide: Read more
Okay, so it’s not the first time we’ve heard a positive spin on deflation.
Who can forget the famous last words of Deflation Draghi in June this year? Read more
Courtesy of Icap’s market analysis team, here’s the turnaround in the Eonia December 13-January 14 spread this month:
The Credit Suisse European economics team are growing concerned about Mario Draghi’s disinflation problem:
Click for the ECB’s official introduction to its year-long “supervisory risk assessment… asset quality review and a stress test” for 124 European banks (who are all listed)…
The capital ratios to be used have already been leaked, but here it is in full from Wednesday’s note — it seems there’s a significant wriggle: Read more