ECB: Decision clearly on the more dovish side - Rabobank

According to analysts from Rabobank, today the European Central Bank “spilled the beans and outlined its policy framework for the coming year”, they see the decision clearly on the more dovish side.

Key Quotes:

“The ECB announced a taper that could probably not be any closer to market consensus. A large majority had expected a three month extension to the end of the year, and the chosen monthly amount of EUR 15bn was also pretty much in line with market expectations. It was clearly a bit more than our expectations of EUR 10bn/month, but as we have noted on various occasions in the past, we were not so much concerned by the nuance of the amount. Instead, these three extra months only serve to solidify the rates expectations, considering that the ‘well past’ commitment was probably the most credible guidance in the ECB’s communication.”

“Despite the announcement that net asset purchases are expected to end this year, the overall statement was read as mostly dovish on balance. This was mainly due to the clarification of ‘well past’: this is intended to mean at least 6 months. Money market rates, and particularly those around the 12-18 month segment of the curve fell by several basis points.”

“We believe that the ECB opted to go for this combination of 15bn for 3 months because it wanted to avoid a too hawkish interpretation of this final step in the net asset purchases. In fact, during the Q&A Mr. Draghi noted that there had been very little discussion about the size or duration of purchases beyond September, as most of this topic had been “thoroughly prepared by the committees”. It feels as though the central bank just went with the consensus to avoid a hawkish surprise.”

“Despite the big announcement today, the ECB still has a few surprises up its sleeve. Most importantly, the policy on the reinvestment of maturing bond holdings has not been specified further than the previously known “for an extended period of time after the end of the net asset purchases, and in any case for as long as necessary”. However, Mr. Draghi acknowledged that the ECB’s stock of purchased assets is an important part of the monetary policy going forward, and that decisions surrounding the reinvestments are an important decision and “not marginal at all”. They are a relevant part of policy, and the Council is mindful of their contribution to the excess liquidity conditions in the market.”