ECB Minutes to be of significant importance this week - BBH

The ECB's meeting's October 26 meeting was more significant and the release of its minutes will be keenly watched by investors, according to analysts at BBH.  

Key Quotes

“It announced the extension of its asset purchases through September 2018 at half the current 60 bln euro monthly pace. There are two debates that investors may look at the record to shed light.”

“First, the ECB left the end date of its program open-ended.  Some officials wanted to provide a date certain that it would end.  The position is understandable.  Growth remains above trend, and the threat of deflation has been extinguished.  However, tactically it would be a mistake.  It would minimize the central bank's options.  It would likely produce an undesirable impact in the market by increasing interest rates, and thus undermining the ongoing operation.”

“One thing we do not think has been fully considered is that when the ECB meets in the June and July next year, the balance sheet may already have begun shrinking.  The cause of this would not be the scarcity of securities that some are focused on.  Rather, starting in the middle of next year, the TLTROs (long-term borrowings) can begin being repaid early without penalty.”

“New lending is growing slowly, and negative rates are still seen as dominating short-term and intermediate-term rates.  As such, we suspect some banks will want to return the undesired and costly liquidity.  The ECB charges 40 bp on deposits.  The German curve is negative through seven years, and the French curve is negative through five.  Spain, Portugal, and Italy offer negative rates out through three years.”

“One of the reasons that the ECB shied away from calling its announcement tapering is that its extraordinary policies have not changed.  Its negative deposit rate remains.  It will continue to fully meet all demand at its refi operations conducted at zero interest rates.  The second debate may have been over linking these measures to some inflation.  This issue can be expected to get more airtime next year.”