Group Economics
ECB Watch
Macro & Financial Markets Research
Nick Kounis, +31 20 343 5616
Mario confident that QE will work
Kim Liu, Aline Schuiling
5 March 2015
ECB confident that QE will be a success, as it becomes more positive on growth…
… while expecting inflation to return to around its goal in 2017
Government bond yields fall on the ECB’s statement
Clarity on details was given although grey areas remain
ECB starts purchases on 9 March
rise in inflation in 2016 (to 1.5%) and 2017 (to 1.8%).
ECB president Mario Draghi announced that the central bank
Regarding the core inflation rate, Mr Draghi mentioned that it
will start its government bond purchases on 9 March as
should be lifted by the euro exchange rate, a rise in disposable
expected. Mr Draghi repeated that the monthly purchases of
household income and a gradual closing of the output gap
EUR 60bn are intended to be carried out until end-September
between now and 2017. Therefore, the ECB seems confident
2016 and will in any case be conducted until inflation is
that inflation will meet its target level on a sustainable basis.
expected to rise to 2% over the medium term. Meanwhile, he
asserted that the ECB already “sees a significant number of
Greek bonds not yet eligible as collateral
positive effects from its monetary policy decisions”, including
With regard to the recent developments in Greece, Mr Draghi
the impact of the announcement of its QE programme.
said that the ECB had decided that Greek government bonds
According to Mr Draghi, the ECB’s measures “will contribute to
would not be eligible as collateral for the ECB’s refinancing
a sustained return of inflation towards a level below, but close
operations until “a successful completion of the review will be
to, 2% over the medium term and underpin the firm anchoring
in place”. In the meantime, the central bank decided today to
of medium to long-term inflation expectations”. He added that
raise Greece’s limit for ELA support by another EUR 500mn.
the ECB is prepared to also buy securities with yields below
zero, but not below its deposit rate of -0.2%.
ECB staff projections
%
Staff projection for GDP growth raised, …
In its new staff macroeconomic projections, the ECB has
2.5
raised its forecasts for GDP growth, roughly reversing the
2.0
downward revisions it made in December. It expects GDP to
1.5
grow by 1.5% this year and 1.9% in 2016 (up from the
1.0
December forecast of 1.0% and 1.5%, respectively). It added a
forecast for 2017 of 2.1%. Mr Draghi mentioned that the
upward revision reflected “the favourable impact of lower oil
prices, the weaker euro exchange rate and the impact of the
ECB’s recent monetary policy measures”. The forecast for
GDP growth this year is close to our own estimate of 1.6%,
0.5
0.0
0.0
Growth
2015
2016
December 14
2017
Inflation
2015
March 15
2016
2017
ECB inflation target
Source: AFME
whereas we are somewhat more positive than the ECB for
2016 (2.2%).
Clarity on details was given although grey areas remain
Mr Draghi gave clarity on a number of features of the purchase
… while inflation should rise to close to the target in 2017
The downward impact of oil prices should push average
inflation down to 0.0% this year, according to the new ECB
staff projections. However, Mr Draghi added that “supported by
the favourable impact of the ECB’s recent monetary policy
programme and confirmed some assumptions. For instance,
he confirmed that the purchases will include the continuation of
the existing ABS and covered bond programmes and that the
additional purchases will include government bonds,
supranational bonds and bonds issued by national agencies.
measures on aggregate demand, the impact of the lower euro
exchange rate and the assumption of somewhat higher oil
prices in the years ahead, inflation rates are expected to start
increasing gradually later in 2015”. The ECB expects a further
Second, he addressed that there will be no duration target and
that the ECB will only buy in the secondary market, regardless
2
Mario confide
ent that QE willl work – 5 Marrch 2015
of the
t type of security (except fo
or ABS and cov
vered bonds). M
Mr
ed back later and
a
firrst few minutes of the statemeent, but bounce
Dra
aghi also confirrmed that all pu
urchases will be carried out b
by
en
nded up a bit higher, on balannce. We expec
ct these trends in
nattional central banks and that central
c
banks will
w exclusivelyy
fin
nancial markets
s to continue.
buy
y their own dom
mestic governm
ment and nation
nal agency deb
bt.
Still unclear is how
w the securities lending facilitty will operate.
All purchases will be eligible for securities lend
ding and these
nsactions will b
be executed in a decentralised manner. Butt
tran
no information wa
as given with re
egard to the co
onditions (we
sume bond for bond) or if a punitive rate will be used.
ass
Room to deviate
e purchases frrom ECB capittal key
p
explained that while
Furrthermore, the central bank president
gov
vernment bond
d and national agency
a
purchases will follow
the
e ECB capital kkey, the ECB will
w still have roo
om to
ma
anoeuvre. In the
e situation thatt the purchasab
ble volume of
ma
arketable debt is insufficient, the
t ECB can sw
witch to
sub
bstitute assets.. This means th
hat if a national central bank
can
nnot buy enoug
gh governmentt bonds (as calculated by the
EC
CB capital key), it could buy elligible national agency bondss or
the
e ECB could de
ecide to buy mo
ore bonds issue
ed by
sup
pranational age
encies.
Lis
st of eligible su
upra and natio
onal agencies
s published
Afte
er the press co
onference a document was re
eleased which
gives insights whiich supranation
nal agencies and national
age
encies are eligiible for QE purrchases. The lis
st of eligible
nam
mes closely follows the ECB collateral criterria. This meanss
tha
at institutions w
which are not re
ecognised by th
he ECB as
nattional agenciess, like BNG and
d NBW, will in principle
p
not be
e
elig
gible for purcha
ases. Howeverr, it seems that the list provide
ed
by the ECB shoulld still be seen as an preliminary list as the
EC
CB reserves the
e right to add more
m
institutions
s.
pact on financ
cial markets
Imp
The
e euro initially rrose on the upw
ward revision in eurozone
gro
owth forecasts. Also his comm
ments that the downside
d
riskss
hav
ve decreased a
also gave supp
port to the euro. As a result,
EUR/USD moved
d back above 1.11 and made a high of 1.111
14.
During the Q&A ssession the eurro fell under pre
essure again
er Draghi's com
mments that the
e ECB could co
ontinue buying
g
afte
gov
vernment bond
ds until they “re
eached the leve
el of the negativve
dep
posit rate”. Also
o the commitm
ment to continue
e the QE
pro
ogramme until S
September 201
16, or even bey
yond, added to
o
pre
essure on the e
euro. We expecct the euro to fa
all further versu
us
the
e US dollar goin
ng forward beccause of the impact of QE and
d
diverging monetary policy pathss on either side of the Atlanticc.
eanwhile, Germ
man 10y govern
nment bond yie
elds declined o n
Me
Mr Draghi’s statem
ment, on balan
nce, while perip
pheral spreadss
ove
er Germany tightened. Eurozo
one equity pric
ces fell during tthe
3
Mario confide
ent that QE willl work – 5 Marrch 2015
nd out more abo
out Group Eco
onomics at: http
ps://insights.a
abnamro.nl/en
n/
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