BNP Paribas: Viel versprochen, noch mehr geliefert

In the run-up to the ECB’s policy meeting on 5 June, there was some concern that having expressed worries about the risks of a “pernicious negative spiral” of low inflation and a strong euro, that the ECB’s package of measures would fail to meet the market’s expectations. The immediate positive reaction after the announcement showed markets were positively surprised and that the subsequent decline should be viewed as normal profit taking rather than a sign of scepticism. One important indicator will be the takeup of the targeted long-term refinancing operation (TLTRO) by banks. This is a ‘pull’ strategy with liquidity being injected to the extent that credit demand picks up, so the ECB has less traction. Quantitative easing (QE) on the other hand is a ‘push’ strategy: the central bank’s asset purchases determine the amount of liquidity to be injected. QE is, at least for the time being, a bridge too far for the ECB, although Mario Draghi did keep open the possibility of even that bridge being one day crossed. In the meantime, another bridge is being built by the decision to step up the efforts of creating a genuine euro-ABS market with the purpose of allowing QE of ABS paper. From a structural perspective, this is also an important step considering the need to improve monetary transmission in the eurozone where capital-market based financing will, in the future, play a bigger role.

The ECB’s messages are clear: inflation will stay low and below their policy objective for quite some time; policy rates will stay low for years to come; if need be the ECB can do more but let’s see first how this works. The investment implications are equally clear: eurozone bond and equity markets should be supported by these decisions. What is also clear is that for several months to come the ECB will now monitor the effects of its decisions implying that policy is now on hold.

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