ECB preview: Draghi will reveal details on ABS and covered bond programmes

We expect the ABS and covered bond purchase programmes to be in the spotlight at Thursday’s ECB meeting. As highlighted in the September statement, the Governing Council will reveal the detailed modalities of these programmes at the October meeting.

We expect the tone at the following press conference to be centred on the new ‘soft target’ of the ECB of a balance sheet expansion. At the hearing before a European Parliament committee, ECB president Mario Draghi once again mentioned the new ECB soft target – an expansion of the ECB’s balance sheet ‘towards the dimensions it used to have at the beginning of 2012’. However, he did not interpret the low TLTRO take-up from last week as a disappointment but insisted that the December auction was needed in assessing the success of the programme. Hence, it seems evident that the ECB will be in waiting mode for the next couple of months.

While the pressure on the ECB to use outright Quantitative Easing (QE) in public assets is increasing, it is still premature for the ECB to take this step. Instead, we believe Mario Draghi will continue to strike a very dovish tone and reiterate that the ECB is ready to use QE if necessary. For now, though, it is expected to await the result of the TLTRO in December and the effects of the purchase programme in ABS and covered bonds before moving on to a real discussion of QE of public assets.

The ECB continues to face a challenging job to get inflation back up to 2%. Survey data continues to weaken pointing to more downside risks to growth. Wage growth in Q2 released two weeks ago showed a decline to a new cycle low of 1.1%. 5Y5Y inflation swap rates have fallen to a new low at 1.93%. Oil prices continue to drop putting more pressure on the low inflation theme. On a positive note for the ECB, the EUR/USD continues to decline rapidly, which the ECB is no doubt very happy with.

The first TLTRO auction came out below market expectations with EUR82.6bn of take-up. Due to LTRO repayments and less demand at the weekly MRO auction, the net injection was only EUR47.3bn, which has taken the level of excess liquidity to around EUR135bn. Excess liquidity should stay in a range of EUR100-150bn until the next liquidity injection from the December TLTRO. This should be enough to put the Eonia O/N into more negative territory, setting new all-time lows once quarterend pressure ease in the money market. In the meantime, the ABS/covered bond purchase programmes should start to provide further liquidity. Importantly, the daily changes in autonomous factors and the weekly 3Y LTRO repayments should continue to be the main source of fluctuations in liquidity conditions.

Changes to the ECB policy rates seems very unlikely as Draghi clearly signalled that the ECB has reached its lower bound with the September cuts (MRO to 0.05% and Deposit to -0.20%).