This morning, the euro rose to a 10-day high along with sovereign yields across the EU as ECB Chief Economist, Peter Praet gave a rather typical presentation outlining the journey and challenges of “Monetary policy in a low interest rate environment” to the “Congress of Actuaries” in Berlin (I know, how did we forget to put this in the diary?). His formal remarks, as usual, were dry but a good synopsis of the factors and thinking that have guided the Central Bank’s current policy stance: highlighting the “innovative and bolder measures” particularly their “Asset Purchase Programme (APP) [which] has been the pivotal component of [their] strategy for countering and reversing the crisis.”
But before going into all the historical details, and possibly losing the attention of even the most diligent of actuaries, he broke the news that, “Next week, the Governing Council will have to assess whether progress so far has been sufficient to warrant a gradual unwinding of our net purchases”. Of course, the market reacted to this news that the ECB is thinking about adjusting the unprecedented bond-buying programme which now exceeds €2.5 trillion: making the ECB owner of 26% of Dutch Debt, 25% of Bunds, 21% of Spanish debt, 18% of OATs and 15% of Italian BTPs.
But beyond all the obvious implications of the ECB warning markets that next Thursday’s meeting will have a live discussion on Quantities Tightening (or QT), is there more behind what’s going on in the European Central Bank?
Last month the ‘apolitical’ ECB scaled back Italian share of bond purchase (despite buying more than usual in absolute terms); this frustrated the new ‘populist’ government who demanded to know whether this was some sort of power-play towards the anti-EU rhetoric being kicked about in Italian politics. In fact, replacing maturing Bunds was the likely reason for the ECB buying a smaller proportion of Italian bonds (although the doubling of spreads between OATs and BTPs from ~100bp to >200bp raises doubts). Following this, some see today’s announcement harbouring similar intentions to double down on this punishing of Italy’s populist agenda; when actually it could be a sign of the opposite.
This bold move to announce the furthering discussion of QT– even if resulting ECB staffers’ comments suggest it is more likely to be July at the earliest – can be seen as a demonstration the ECBs confidence about Italy’s commitment to the EU, and is happy to move ahead with measures that seem data-appropriate for the broader Union. Still we have plenty to look forward to next week now with the Fed, ECB and BoJ meeting along with US CPI figures and Trump’s North Korea Summit.