March 06, 2015
It should perhaps not come as a surprise that Mario Draghi explains the recent economic recovery in terms of the ECB's policy - more so than the oil price. But it seems to us that at least some of the optimism expressed yesterday was self-referential. If you read the ECB's staff macro projections, one of the first items that jumps at you is the redefinition of the impact of the policy - TLTRO and QE - on the economic forecast. QE is deemed to be fully effective as the forecast now takes into account
"... the additional impact of these measures via financial transmission channels, such as a portfolio rebalancing channel, certain expectational channels and real-financial feedback loops. Such channels are not normally captured by the standard modelling framework used in the projection exercises."
So this is a bit like "famous for being famous".
If you abstract from the oil price shock, the eurozone economy is indeed in a moderate cyclical recovery - the actual impact being boosted by the impact of oil on GDP. Here is the key section from the projections:
Note that the recovery also applies to core inflation. If this is your forecast, then you surely have no doubts about your policy. That assumption was very much reflected in Mario Draghi's press conference, which carried a certain "crisis over" sentiment. In fairness, Draghi included a number of qualifiers - that the recovery would be dampened by balance sheet adjustment, a slow pace of structural reforms, and continuing subdued dynamics in lending to the non-financial sector.
His main ground for optimism was based on the recovery in measures of inflation expectation, especially the 5y-5y rate, which this morning stood at 1.765%. But beware of this metric - which has a poor forecasting record. The 2 year inflation swaps are at 0.6%, the 5y swaps at 0.95%, and the 2y-2y forwards at 1.1%. These are the horizons over which monetary policy has an impact.
Speaking in Cyprus, he had quite a lot to say about Greece and Cyprus, which we analyse in a separate story. The main anticipated news yesterday was the details of the QE programme, which now starts officially on March 9. The list of the institutions and agencies whose bonds the ECB can buy is here. It also said that the deposit rate currently at -0.2% set the floor for the yields of the assets the ECB could buy.
We liked the way Draghi dismissed the fears of shortages of bonds during an otherwise uneventful press conference:
"It’s quite interesting that until a month ago, nobody had any doubt that public debt, sovereign debt in the euro area, was actually very, very big, and now some people worry that we won’t have enough bonds. Incidentally, I’m told that the very same statements were made when the US and the UK started their bond buying programme."
The ECB also produced a good Q&A on the public sector purchase programme (PSPP), which is now the official name for QE. There were two items we find noteworthy to highlight in this briefing. The first relates to the €60bn monthly target. Will it be bureaucratically applied, month by month, or is there some flexibility? The answer is the latter:
"The ECB's capital key will guide purchases on a monthly basis. However, this does not imply that a precise achievement of capital key shares will be strictly targeted every month, as some flexibility on a monthly basis will support the smooth implementation of the programme."
The other points relate to the various limits. The 25% issue share limit is needed for the ECB to avoid obtaining a blocking minority in a debt restructuring. It includes the bonds in the SMP programme. The 33% issuer limit is to safeguard a proper functioning of the sovereign bond markets. And all those numbers are based on nominal value, not market value.
We also have stories on Greece’s No’s from the ECB, on Syriza’s new diplomatic offensive, on the economic platform of Spain’s anti-establishment parties, and on Renzi taking his own approach to Russia.