ECB meeting forecast: Waiting for the QE purchases to start

• The ECB meeting next week is very likely to be less interesting than the meeting in January when the ECB announced its QE programme.

• Focus will be on further details about the purchases and the upcoming publication of the Legal Act. However, we do not expect a major market impact, as the details announced in January were much clearer than we are used to when the ECB launches new measures.
  

• Having said this, there are still unanswered questions and Mario Draghi is likely to be asked questions about the following.

When will the ECB start buying bonds?

The ECB’s Benoît Coeuré has said bond purchases will start in the first fortnight of March. In our view, this implies that the ECB will have to release the Legal Act next week so that purchases can be initiated in the second week of March.

We expect the first purchases on Monday 9 March. Although there is a risk of a later start, they should start no later than Friday 13 March.

Will the ECB buy bonds already yielding negative?

At the meeting in January, Draghi was asked whether the ECB had considered buying bonds that are already trading in negative territory when it comes to yields and without hesitation, he said ‘second question, the answer is yes’. Nevertheless, the German Bundesbank official in charge of the operative side of the asset purchases has said ‘there are many details to clarify, also regarding the purchase of bonds with negative yields’. Hence, this is something that needs to be clarified.

We believe the ECB will buy bonds that are already trading in negative territory when it comes to yields and, in our view, this will not mean the ECB generates a loss. Instead, we believe it is set to be a money machine.

How open ended is the QE programme really?

Questions have been raised about whether the QE programme really is open ended as purchases are ‘intended’ to be carried out only until September 2016. Related to this, Draghi is likely to be asked to clarify the difference between the wording in the introductory statement and the QE press release. This follows as the introductory statement said the purchases are ‘intended to be carried out until end-September 2016’, whereas the press release had a stronger wording stating that purchases were ‘intended to be carried out until at least September 2016’

We expect the purchases to be carried out at least until end-September 2016, although we believe the recovery will gain momentum and headline inflation will print above 1% as early as the beginning of 2016.

Will National Central Banks (NCBs) be limited to buying only their own bonds?

According to the ECB’s Peter Praet, the Governing Council intends to share the profits of the asset purchases the same way as potential losses will be shared. This way of profit sharing indicated that the NCBs will buy only their own country’s government bonds, as it would otherwise require some sort of distribution of profit back to the NCBs.

We see it as most likely that the NCBs will be limited to buying only their own bonds but this should have very limited if any implications for the financial or economic impact.

• Focus is also likely to be on Greece after the ECB in the beginning of February lifted the waiver allowing Greece to use its bonds as collateral arguing that ‘it is currently not possible to assume a successful conclusion of the programme review’, With the new Greek agreement to extending the bail-out programme by four months focus will be on whether the ECB will again allow Greek banks to use its government bonds as collateral instead of only being able to get liquidity through the Emergency Liquidity Assistance (ELA) in the Greek central bank.

• The ECB will also release new growth and inflation projections including the first forecasts for 2017.

The ECB’s inflation forecast for 2015 will be revised down in the deflation area. In December, the ECB revised its inflation projection down by 0.4pp but when it was released the ECB noted that the oil price decline would warrant an even lower forecast. Given the current oil price futures, we expect the ECB to lower its inflation projection for 2015 to -0.1%. For 2016, we believe the ECB will lower its forecast a bit to 1.2% and, regarding the new 2017 forecast, we expect a forecast of 1.5%. This would be consistent with the first forecast for 2016, which was released in March 2014.

Our forecast is that inflation remains negative for most of 2015 and we expect an average of -0.3%, whereas we forecast 1.4% in 2016, which is above consensus.

The ECB’s GDP growth forecast was revised considerably lower in December. The outlook for 2015 was lowered to 1.0% from 1.6% in the September projection and for 2016 it was lowered to 1.5% from 1.9%. Following the release of the December projection, GDP growth surprised on the upside in Q4 14 and survey-based data has improved at the beginning of 2015. Based on this, we believe the ECB is likely to revise its forecast higher and thus converge to consensus of 1.2% GDP growth in 2015 and 1.6% in 2016.

Our forecasts for economic activity remains above consensus for both 2015 (1.5%) and 2016 (2.0%).