Draghi gave a cautiously optimistic press conference yesterday. Putting to one side the raft of questions relating to Greece and Cyprus, the message I took away was that the ECB are pretty pleased with both the market reaction to the announcement of QE and the modestly more positive economic news over the past month or so.
Indeed, on the impact of the policy announcements, Draghi said: “We have already seen a significant number of positive effects from these monetary policy decisions. Financial market conditions and the cost of external finance for the private economy have eased further, also following our previous monetary policy measures. In particular, borrowing conditions for firms and households have improved considerably.” And on the recent data, following a better-than-expected Q4 GDP print: “The latest economic data and, particularly, survey evidence available up to February point to some further improvements in economic activity at the beginning of this year.”
The more positive tone was reflected in the staff forecast (which Draghi was at pains to say incorporated all their policy decisions):
The upward revisions to growth in 2015 and 2016 come from upside news in activity, policy actions and lower oil prices. While oil prices have a big negative impact on inflation in 2015, the projection has actually been revised up two-tenths in 2016 and is back to target range in 2017. Of course a cynic would say that the forecast has to back to target to justify the policy actions. But I think for now it is worth focusing more on 2015 and 2016 when thinking about the ECB’s next move.
Draghi also noted that while the risks remained on the downside, they had also diminished.
A few other points to note from the press conference and subsequent materials released on the modalities for QE:
- The ECB will buy bonds with negative yield, but not those that are more negative than the depo rate (-0.2%). This at least means they are not making an immediate loss on those purchases, and should act to put a floor on negative rates.
- If there are insufficient govt bonds in any particular jurisdiction (this applies to some small countries like Latvia) then alternative purchases are foreseen. This shouldn’t be a big issue for the programme, as these constraints will not bind for the larger countries.
- The details on how the auctions will actually work with regards to maturity buckets remains pretty unclear. They say that the intention is to be market-neutral and minimise distortion. The BoE made somewhat of a hash of this in the early days, but got it right by the end of the QE programme. Let’s hope the ECB has learnt from that.
The market reaction to the press conference was pretty positive. SX5E finished the day up around 0.5%, the euro down about 0.5%, bunds rallied a little and peripheral spreads narrowed. Draghi will no doubt be quite happy with all of that.
Fundamental Macro 