ECB: assessing time

In July the ECB did not embark in other policy actions after delivering a package of measures just one month ago. The ECB monetary policy stance remained unchanged and it is unlikely to change for a while unless a drastic deterioration of the economic outlook occurs. Several quarters are needed for assessing clearly the effects of the June’s package on the economy. 

• As expected, the ECB did not embark on other actions after delivering a package of measures just one month ago. However, the Council communicated on several important topics such as the type of actions the Bank might take on top of the June package, new details on the TLTROs and a new frequency-time for the Governing Council meetings starting from January 2015. 

• As regarding the first point, listening to the Q&A session with journalists, it is rather clear that if the economy evolves in line with the ECB projections (gradual recovery that progressively gains some momentum, and inflation which moderately increase going forwards), the ECB will not embark on further actions. In addition, the ECB is willing to assess the effects on the economy of the actions taken so far. As it is well known, the first two TLTROs will be conducted in September and December, while the first credit-conditioned TLTROs will be conducted in March 2015. The Governing Council is convinced that all the measures adopted in June will ease funding conditions for the economy, increase credit growth and eventually support activity and lift inflation. 

• Yet, President Draghi signalled that the ECB might embark on further actions if needed and even before the launch of the TLTRO, should conditions drastically weaken. The trigger point will be a deterioration of the medium outlook for inflation. For the time being the ECB foresees an inflation rate at 0.7% this year, at 1.1% next year and 1.4% in 2016. The new ECB projections to be released in September will be pivotal to understand future actions from the Bank. 

• What kind of actions could be decided if needed? Key policy rates have probably reached their lower bounds, as reaffirmed today by president Draghi. Therefore, purchases of asset securities will be the next action. The first move would be to implement an Asset Backed Security (ABS) purchase scheme, something on which the ECB is already working. Mr Draghi played down some critics regarding a potential intervention in ABS markets. Their small size might reduce the effectiveness of any ECB action. Yet, according to Mr Draghi, the size of ABS markets are endogenous. Therefore the presence of a strong buyer (the ECB) might revitalize the market.