ECB to address three broad areas: QE, shortage of securities and the repo market - BBH

On Thursday, the European Central Bank will meet. According to analysts from Brown Brother Harriman, the meeting is live in the sense that the central bank is widely expected to take fresh actions, ostensibly backed by new staff forecasts and they see three broad areas that the ECB is expected to address:

Key Quotes: 

“First, the current buying program has a soft end date as of the end of March 2017.  It is a soft deadline because ECB President Draghi has made it clear from the get-go that the purchases would continue until the central bank was confident that inflation was moving toward its target, which is near but a little below 2%.”

“The ECB is widely expected to extend the buying for six months.  Six months is the increment by which the buying was previously extended.  The ECB is currently buying 80 bln euros a month of debt.”

“Second, the ECB will likely address the shortage of some securities. Cutting the purchasing amount would not be an effective tool to do this.  Instead, there are two steps that would be to the point.  What we are talking about here is modifying some of the ECB's self-imposed operational rules.  Until now the ECB limits its purchases to 33% of any individual security.  The ECB may consider raising it to say 50%.”

“The ECB limits its universe of acceptable sovereign bonds for its program by imposing an interest rate floor at the deposit rate, which currently sits at minus 40 bp. There need not be a relationship between the deposit rate and the asset purchase program, but the optics do not look so good to decouple them.  However, to the extent that it is meaningful, the issue is on the portfolio level, not the individual security level.   

“The third issue that will likely be on the ECB agenda is the repo market. This is an important part of the capital markets plumbing.  Investors may think of bonds as a fixed income investment vehicle.  For bond dealers, banks, and some other market participants, bonds are also used for collateral in other financial transactions, especially repo operations.”