June 14th, 2018

ECB Morning Note

June ECB Meeting Preview: slow-mo tightening plans

  • First the mundane stuff about today’s ECB meeting. We expect the ECB to announce today that QE will be ended gradually in the fourth quarter, despite rumors to the contrary. We’re agnostic on whether or not the ECB will still state that the program can be extended if necessary. The language will probably be removed as well, though if it’s still there, it’s for symbolic purposes only, really. Naturally there will be no change in rates.
  • But should we really be excited about today’s ECB meeting? Put differently, should we get excited about the ECB drip-feeding information about its slow-moving tightening plans? The answer is no.
  • On the next page is an overview of the next steps in the ECB’s tightening cycle. It’s from our report with forecasts for ECB policy for the next 30 months that is nearly finished (truly nearly finished!). The final and symbolic taper of QE in the fourth quarter entails another 60 billion euros in bond purchases: 30 billion December in October; 20 billion December in November and 10 billion euros in December. It really is that simple. The dovish outcome would be for the ECB to delay the decision on QE’s fate and, more importantly, extend the taper throughout the first quarter of 2019. Note that we never believed in a so-called pre-emptive deposit rate hike: raising the deposit rate with QE still running. Quite a few sell-siders believed the ECB would in fact tinkered with rates by now…




  • Before Italy exploded the ECB might indeed have waited until July to announce the final taper. After all, the ECB has been dragging its feet every time issuer/issue limit and capital key constraints forced the bank to announce cuts to QE purchase volumes. But not this time around. Lega’s and M5S’ rants against the euro have sharpened minds in Frankfurt. While Finance Minister Tria and European Affairs Minister Savona have seemingly walked back on their heretic remarks (monetary financing in case of Tria; euro exit and getting even with the Germans in case of Savona), the genie is out of the bottle so to speak. Even leading doves such as chief economist Peter Praet are ready to axe bond buying now. Even though improvements in underlying inflation are meagre, and even though growth has slowed persistently this year, with money growth signaling further weakness ahead, the doves are onboard the tightening train. Even the doves see inflationary greenshoots. And they can rightly claim that the economy will continue to grow above potential for the foreseeable future. Financial conditions remain generally accommodative. Real rates outside of Italy remain low; the real short rate remains deeply negative, having decoupled from the marked rise in the US real rate; and while credit spreads have widened, equity prices are up YTD. Bottom line, for Draghi & Co the grounds are still fertile enough to tighten policy further.
  • But even if Draghi & Co were to delay the QE announcement to July, the tightening timetable is unlikely to change. QE will still be brought to an end in the fourth quarter regardless of the timing of the announcement.
  • With the writing on the wall for QE, the truly important stuff is what the interest rate hike cycle will look like: the timing, pace and increments of rate hikes. But note that besides ‘normalizing’ rates policy, the ECB also has to reverse the TLTRO’s, fixed rate full allotment, easing of the collateral schedule and unwind QE itself. And here comes the drip-feeding thing again. Draghi won’t touch upon any of these things today. He will try to put a dovish spin on finishing off QE, and save the interest rate hike stuff for later this year, probably the fourth quarter.