What to watch for at the ECB meeting

Posted on July 21, 2016

Mario Draghi did not give the impression of a man — or a central bank — in panic mode©Reuters

ECB president Mario Draghi could indicate responses to the UK’s Brexit decision

Brexit is set to dominate the European Central Bank’s agenda today — when the ECB’s governing council gathers for the first time since the UK’s vote last month to leave the EU.

But the council’s 25 members are not expected to unveil a fresh round of measures just yet.

    The central bank is widely expected to keep interest rates unchanged — a decision expected at 12:45 UK time — with the benchmark main refinancing and deposit rates remaining at 0 per cent and minus 0.4 per cent respectively.

    But Mario Draghi, ECB president, could hint how his central bank will respond should the UK’s decision to break away from Brussels threaten the eurozone’s faltering economic recovery.

    Here is what to look out for in the press conference, which begins at 1.30pm.

    The economic cost of Brexit

    It is too soon for the eurozone’s monetary policymakers to know how Brexit will affect the economy of the single currency area.

    However, Mr Draghi’s words at the press conference may contain clues about whether Brexit means that the ECB’s economists are likely to downgrade their projections for growth and inflation when they review them in September.

    The bigger the downgrades, the higher the chances that policymakers will unleash more monetary stimulus in the autumn.

    The evidence so far is mixed. Some measures of economic confidence have fallen and bank shares in Italy have plunged, but the ECB’s survey of eurozone banks indicated that Brexit has yet to curtail lending to people and businesses in the region.

    All the same, the ECB broadly shares the view of private sector economists that the vote to leave could cost the eurozone about 0.5 percentage points of growth over the next three years, an amount that the single currency area can ill-afford to lose.

    QE scarcity

    The Brexit-induced flight into safe-haven assets has led to a fresh wave of concern over a problem that has dogged the ECB since it first unveiled its €80bn-a-month quantitative easing programme in January 2015: it could run out of assets to buy.

    Eurozone central banks have struggled to buy sufficient bonds at prices that meet the ECB’s rules.

    According to figures from Tradeweb, a financial services company, just under €1tn of eurozone debt is now ineligible for the ECB’s QE programme, since its yield is less than the central bank’s limit of minus 0.4 per cent. This represents 17.5 per cent of the entire market for eurozone debt.

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    The shortage of eligible securities is particularly acute in Germany, where falling yields — which move in the opposite direction to bond prices — have meant more than 50 per cent of the securities eligible for purchase are now too expensive for the ECB to buy.

    Brexit has not only shrunk the pool of government bonds that the central bank can buy, but also raised the chances that officials will have to extend the QE programme beyond the current deadline of March 2017 because of the impact on the eurozone’s recovery.

    The council is set to discuss how the QE package can be reshaped on Thursday. None of the options available are without drawbacks


    A decision on whether to tweak the rules on purchases of government bonds — or expand the list of eligible assets — is not expected until September. But Mr Draghi could offer hints on how the central bank could change the design of the programme, as well as on what would need to happen to push policymakers to extend it beyond next spring.

    Repairing Italian banks

    The turmoil that followed the Brexit vote also highlighted concerns over the health of the Italian banking sector. Several Italian several lenders have high volumes of loans on their books that are not currently being repaid.

    Expect the spotlight to turn back to the issue of non-performing loans in Italy and perhaps elsewhere in Europe too, when the latest European bank stress tests are published on 29 July.

    The ECB has hinted that it will back some form of state aid for lenders, with Vitor Constâncio, vice-president, indicating that EU rules were flexible enough to allow some form of government support.

    Mr Draghi could be asked for his view, but the subject is delicate for an ECB president who, before coming to Frankfurt in late 2011, headed the Italian central bank.

    Additional reporting by Mehreen Khan.

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