ECB Minutes Hint At Potential Roadmap


The European Central Bank (ECB) recently released the minutes from their December meeting. While the minutes have not changed our view of potential policy action by the ECB, we believe they provide some detailed insight as to the likely timeline of further action.

Key takeaways:

  • The most important piece of information gleaned from the minutes is that if the ECB decides to loosen monetary policy further, they will do so through lowering the deposit rate further. This is clearly targeting the currency rather than peripheral government spreads.
  • The ECB indicated the rate will be lowered gradually in 10 bps increments, rather than a “big bang” approach.
    The ECB indicated they will not extend or expand QE purchases until further cuts in the deposit rate have been tested.  Our view is that there is a lower bar to extending QE purchases post the current end date of March 2017 compared to expanding the monthly QE purchase amount. The ECB will also continue to rely on Targeted Long-Term Refinancing Operations (TLROs) to help guide QE to the real economy.
    If the ECB resorts to an extension in QE, it will likely continue to have a clearly defined end date rather than an open ended commitment.
  • Finally, we believe the ECB may lower their inflation forecasts at the March meeting. However our view is that they will potentially reduce the impact of this by focusing more closely on core CPI, rather than headline, given recent oil price volatility.

ECB March meeting forecast
The next ECB meeting is a regular forecasting meeting scheduled for March 2016. We believe the ECB will take the opportunity to lower their inflation forecasts and will remain dovish in their communications. At this stage, given that the drop in inflation is driven by oil – rather than the underlying Eurozone economy – our view is that the ECB will not take action at the March meeting. If they do take action, it will most likely be a 10 bps cut in the deposit rate. Otherwise, we expect action to come only at or after the June meeting. Such action will likely take the form of a 10 bps deposit rate cut, and then later followed by a 6-month extension of QE if required.

The comments provided herein are a general market overview and do not constitute investment advice, are not predictive of any future market performance, are not provided as a sales or advertising communication, and do not represent an offer to sell or a solicitation of an offer to buy any security.  Similarly, this information is not intended to provide specific advice, recommendations or projected returns of any particular product of Standish Mellon Asset Management Company LLC (Standish).  These views are current as of the date of this communication and are subject to rapid change as economic and market conditions dictate. Though these views may be informed by information from publicly available sources that we believe to be accurate, we can make no representation as to the accuracy of such sources nor the completeness of such information.  Please contact Standish for current information about our views of the economy and the markets.  Portfolio composition is subject to change, and past performance is no indication of future performance.
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