ECB: No need for new action now - BBH

The ECB meeting is not important for what it officials will do as they fired their bazooka of sorts last month, and there is no need for new action now, according to analysts at BBH. 

Key Quotes

“The asset purchases will continue at a 30 bln euro pace starting next month through September 2018.  There are voices that want a clear signal that September will conclude the purchases.  The decision need not be made now, and we don't expect it until next summer.  There is no compelling reason to pre-commit.”

“After being rebuffed on this front, the creditors may seek another line of attack.  The ECB's monetary stance is much broader than asset purchases.  These other tools, like negative deposit rates, a zero interest rate on refi operations that are fully allocated, have been discussed much, except sequentially, that asset purchases are to stop first.  There may be some push to consider an exit strategy for these too.”

“The ECB's corporate bond buying program may also come under scrutiny.  Some creditors were not keen about it from the start.  The ECB now holds bonds of more than one thousand companies.  It  appears that the Eurosystem may own a couple dozen bonds rated below investment grade (notional amount 21.2 bln euros), which account for about 16% of the corporate bond portfolio.”

“Last summer, the ECB bought some of the 800 mln euros of bonds issued by the European branches of the South African-based retailer, Steinhoff, who is now mired in an accounting scandal. The company lost its investment-grade status, last week.  The ECB may have to realize a loss on the bond, or if it is converted to equity (which may be the case), a loss on the stock, which the ECB's own rules prohibit it from owning.  Look for the ECB to be pressed by reporters on this issue.”

“The ECB does not publish the amount of individual issues purchased, just the names of the credits.  This is an area that greater transparency from the ECB may be helpful, and would seem like a small price to pay for buying the wrong bond.  Some observers seem to be exaggerating the impact on the ECB and worry (for naught) about the central bank's solvency.”

“Consider the unbiased assumption that the ECB bought the roughly $130 bln of corporate bonds it holds were divided equally among the issues.  That would be less than $130 mln average exposure,  This is an important amount, but the loss needs to put in the context its balance sheet, and the seigniorage and profits it has accrued.   It does not make for good press,  the solvency of the ECB and the Eurosystem is not an issue.”

“The ECB staff will update the macroeconomic forecasts.  There are three things to watch.   First, the staff will introduce the 2020 forecasts for the first time and hence will offer new information.  Second, the CPI 2020 forecast will be particularly important. Will it forecast that the inflation target of near but lower than 2% be achieved?  The 2019 forecast in September was 1.5%.”