Reaction to ECB press conference

The ECB decided to keep rates and policy unchanged this month in a meeting which saw all the focus centre around the application and intricacies of the new ABS programme that will be implemented in Q4. The double whammy introduction of both lower rates and a new asset purchase scheme at last month’s meeting meant that today was always likely to be somewhat of a dampened meeting in comparison, with Draghi highly unlikely to ease further despite reductions in both core and headline CPI.

The usual tones from Draghi led the way at the meeting, with a focus upon structural reforms as a key component of any recovery, along with the monthly reiteration that the ECB stood ready to implement further ‘unconventional’ measures. However, whether we will ever see the introduction of the ultimate measure, QE, will be largely driven by the success of the ABS scheme that was the hot topic at today’s meeting.

The ABS scheme did surprise in its extent, with the ECB being willing to purchase securities on the riskier end of the spectrum. Thus, with the ECB willing to purchase the so called ‘Mezzanine’ tranches along with the ‘senior’ tranche that was expected. This willingness to take on greater risk was personified by the willingness of the ECB to purchase so called ‘junk bonds’, below BBB-, which means that the likes of Greece and Cyprus will be included in this scheme.

Ultimately, the success of this will be established in time and given that the two main policies of ABS (Q4) and TLTROs (2nd tranche in December) come later in the year, it is likely that we could see further deterioration in the meanwhile. The market clearly have a disdain for any policy’s effectiveness apart from a QE programme and thus today’s subsequent sell-off is not surprising. Until there are any signs that these programmes work, markets are unlikely to be overwhelmed by their implementation.