ECB September Meeting

Back at school, “Il professore” did not introduce any new monetary policy measures, but did maintain the pressure to generate good figures. At this meeting, he left the key ECB interest rate and the pace of asset purchases unchanged:

• Main Refinancing: 0.05%
• Deposit Facility: -0.20%
• Marginal Lending facility: 0.30%

PSPP programme and rate:

• The ECB has raised the issue share limit of its asset purchase programme from 25% to 33% following a 6-month review. The ECB will firmly implement its asset-buying programme until at least September 2016 and for as long as is necessary to restore medium-term price stability.
• Mario Draghi continued to emphasise that the Governing Council was ready to adjust the size and duration of QE, if needed.

The economy:

• The ECB delivered a more dovish statement.
• The ECB revised its inflation and growth projections to the downside with the revisions of the HICP. Risks remain on the downside: inflation forecasts, have been revised down to 0.1%, 1.1% and 1.7% for the coming years (from 0.3%, 1.5% and 1.8%), due to lower oil prices. The ECB cut its oil-price assumption to 55.3$ from 63.8$. Draghi also mentioned that the low or negative inflation in the months to come is likely to be mostly transitory, as it is related to commodity prices.
• GDP growth was revised down to 1.4% this year and 1.7% next year, and 1.8% in 2017 (from 1.5%, 1.9% and 2%), mainly due to lower external demand. Draghi also mentioned that the emerging market slowdown would weigh on global growth.
• Draghi denounced the idea that it had become increasingly difficult to stimulate growth with monetary policy measures: “So we have evidence that our monetary policy works. At the same time, we have the rest of the world, and we have these effects that we've observed over the last few weeks – perhaps more than a few weeks; especially in the last few weeks – so we'll have to see whether these effects are transitory or are permanent.”

For now, the ECB is just underlining that QE is a flexible tool that could be improved to get what the Institution wants.

A YEAR OF CONVENTIONAL AND UNCONVENTIONAL MEASURES

Just one year ago, Mario Draghi announced a final rate cut at the ECB meeting, when he significantly evoked the use of unconventional measures. Since then, several actions have been undertaken by the ECB, and a QE programme launched.

How has the economic and financial situation in the euro area evolved during the last 12 months?

Liquidity

The different measures taken by the ECB have had a strong impact on liquidity excess. The asset-backed securities, covered bonds and public securities purchases programme, as well as the several TLTROs injected at a value of around 400 bn € into the system, increased the liquidity excess to 498 bn € on September 2nd 2015. With a buying path of 60 bn € per month, and with the new TLTROs in September and December, this liquidity will continue to grow until the end of the QE programme in September 2016.

On the rate side, the EONIA stepped into negative territory, and has been decreasing ever since. It is now fixed between -0.13% and -0.12%, and will decrease even more.

The Euribor has followed the same path. The EURIBOR 3M is now at -0.033%, and the EURIBOR 6M is at 0.039%.

The economy

All these measures implemented over the past year have weakened the EUR currency (-15% against the USD) and supported the European economy. Inflation, after being negative, has reverted to positive territory (0.2%) and GDP growth is now at 0.3%. Finally, the unemployment rate has improved and is now at 10.9%.

Conclusion

After one year of implementation, the ECB remains concerned about economic growth and inflation. Thus in this market context, the ECB will maintain an accommodative stance for a long period of time.

All these measures (unconventional as well as conventional measures) will maintain a high liquidity excess in the banking system and anchor euro-zone government bond yields in negative or low-level territory.

Pierre Boyer
Head of Money Market fund management