In the midst of a very unusual week for the eurozone (the prime ministers of the number-two and -three economies resigned), the ECB once again managed to surprise the markets:
This is not tapering! On the contrary, Mario Draghi's message points to an even more sustained market presence for the ECB. He said that achieving 1.7% inflation in 2019 (the ECB's forecast to that horizon) was "not really" the same as achieving a target.
The door is closed in terms of the change in capital rule. Changing the maturity constraint, and removing the yield constraint, increases the inventory of PSPP-eligible German securities by quite a lot. This shows that the decision has been made to continue the QE without dropping the capital key rule. We can imagine that purchases of German securities will be redirected toward the short portion of the curve.
These adjustments are a solution to the problem of German bond rarity. The Eurosystem currently holds €290 bn in German debt. Assuming that programmes will be uniformly reduced in size, the Eurosystem should purchase nearly €170 bn in German debt in 2017 (with net issuance close to zero). Yet PSPP-eligible German debt, respecting the issue share limit, is now close to €465 bn.
These new measures are positive in the medium term for the financial sector because they lessen the pressure on the long portion of the German yield curve. The low-rate environment had heavily weighed down financial security performance: the Euro Stoxx banks lost more than 25% over the first nine months of the year. So, 45% of the euro fixed-income market offered negative yield. With the recent rise in yields since September, the financial sector has outperformed on the equity and credit markets. There is no possible parallel with 2008: banks' solvency, liquidity, and financing structure have increased significantly to meet with new regulatory constraints.
Against this backdrop, its seems legitimate to once again emphasize that ultra-accommodative monetary policies are close to reaching their limits. Mario Draghi drove home the message more than usual about the importance of fiscal policy and structural reforms to support economic growth.The ECB is desperately seeking a partner to which it can pass the ball.
Valentine AINOUZ, Bastien DRUT
Bastien Drut & Valentine Ainouz
Strategy and Economic Research at Amundi