Brandenburg explained that in his view the central bank can either reduce the deposit rate from the current -40bp, buying more short dated bonds and steepening European government bond curves, or allow its member central banks to shift purchases away from scarce assets such as Bunds, towards the bigger peripheral markets like Italy.
Salman Ahmed, chief investment strategist at Lombard Odier Investment Managers, expects the ECB to kick the can down the road at this meeting.
“At tomorrow’s monetary policy meeting we expect the ECB to switch back into easing mode after the summer break,” he said. “We believe there is a strong possibility that the duration of the buying programme will be extended to September 2017 or beyond. This will be supplemented by some technical adjustments to the modalities of the easing program to relieve the constraints on buying more assets, especially, the shortage of German bonds.”
“At this stage, a shift away from capital key based allocation looks unlikely but if done it will kill two birds with one stone,” added Ahmed. “Such a move will increase the impact of the stimulus and will also ease the constraints facing the central bank.”
Tanguy Le Saout, head of European fixed income at Pioneer Investments, believes the ECB has more room for manoeuvre than many of his peers do however.
“The ECB approach their meeting this week in a good position. Recent data has shown that, so far, the impact of Brexit on European economic activity has been minimal, with August Purchasing Manager Indices holding around the average for 2016,” he said. “So no pressure for immediate or significant action. What will concern the ECB is the recent inflation data, which showed minimal pick-up at the headline level, whilst the core rate actually fell on an annualised basis.”
Whatever the ECB does announce tomorrow it will not please everyone, that is certain. The QE programme has to be phased out at some point though, and the longer it is left running the sharper the shock to markets will be when the tap is eventually turned off.
