ECB patiently awaiting impact of latest measures – Danske Bank

Research Team at Danske Bank, notes that the ECB is now implementing the easing measures it announced in March, including further loans to the banks (TLTRO II) and an expansion of government bond purchases from EUR60bn to EUR80bn per month.

Key Quotes

“We therefore do not expect the ECB to launch any new initiatives over the summer, when it is likely to instead focus on the impact of the easing measures on the economy. Mario Draghi said at the ECB’s April meeting that monetary policy is working but that patience is needed.

Looking further ahead, we expect the ECB to extend bond purchases beyond March 2017, as inflation does not really appear to be picking up. In our view, the ECB is unduly optimistic on the core inflation outlook and is likely to regularly revise its projections lower.

The latest round of monetary policy easing means we are unlikely to see any major increase in Eurozone bond yields and we would definitely not rule out the possibility of further downside pressure on yields over the next few months. The ECB’s new easing measures could well result in Germany being the next country – after Switzerland and Japan – to experience 10Y bond yields slipping into negative territory.

Nevertheless, we still expect modest upward pressure on yields on the 6-12M horizon due to a spill-over from the long end of the US yield curve, though we remain convinced the ECB can keep 2Y and 5Y yields anchored via QE purchases and a deposit rate of -0.4%. We therefore still expect the 2-10Y and 5-10Y euro curves to steepen somewhat. We also expect 3M EURIBOR fixings to remain negative for the coming 12 months.”