Breaking News
Get Actionable Insights with InvestingPro+: Start 7 Day FREE Trial Register here
Investing Pro 0
Ad-Free Version. Upgrade your experience. Save up to 40% More details

What Are ECB's Policy Options?

By London Capital Group (Ipek Ozkardeskaya)Market OverviewSep 08, 2016 05:31AM ET;s-policy-options-200152374
What Are ECB's Policy Options?
By London Capital Group (Ipek Ozkardeskaya)   |  Sep 08, 2016 05:31AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items

The European Central Bank (ECB) will meet today and is expected to maintain the interest rates unchanged. Half of investors expect an expansion in the ECB’s asset purchases program as soon as today, while the remaining half expect to hear more about the future options the ECB would consider to further loosen the monetary conditions in the Eurozone.

Given that we are approaching the end of the ECB’s Quantitative Easing (QE) program, which is due on March 2017, the ECB will sooner rather than later announce the next step

Today’s meeting could basically be about discussing the future options, while a concrete action is more likely at October, or December meeting.

The most likely and the easiest to implement measure is an extension of the QE program. September 2017 could be a satisfactory revision, as it would give the ECB six more months to deal with the post-Brexit turbulence in the Eurozone economy, the Italian banking crisis, and Spanish, French and German elections.

Per se, the possibility of additional monetary boost is not sufficient to convince investors, as the pool of available bonds is drying at a visible pace. The ECB’s massive bond buying program injected an unpleasant distortion in the Eurozone’s sovereign market. As of today, the two-thirds of German bonds are no longer eligible, because they offer a yield below the ECB’s deposit rate limit of -0.40%. In a similar way, the 30% of the Eurozone bonds could not be added in the ECB’s balance sheet.

Given the constraints and distortions in the Eurozone’s sovereign market, the ECB had recently announced to extend its QE program to Eurozone corporate bonds. As a result, Henkel (DE:HNKG) and Sanofi (PA:SASY) have been the first corporate bonds to issue debt with negative yield this week.

As the risk-to-return distortion spills over the corporate bond markets, the ECB is left with the possibility of removing the lower limit rules for bond purchases and allow buying bonds that yield below the deposit rate, or simply lowering the deposit facility rate.

It could also consider changing the capital ratio. This measure is among the least preferred ones on the list of possible actions, given that it would have serious political implications. In fact, changing the capital ratio would favour countries with high debt levels, and would be hard to digest for countries like Germany and Austria.

Finally, the ECB could potentially enlarge its scope and consider buying overseas bonds, which could not only release the pressure in the Eurozone's sovereign and corporate bond markets but could also cause a suitable depreciation in the single currency.

Today, investors in the Eurozone will be seeking more clarity in this jungle of possibilities. As the Bank of Japan (BoJ) Governor Kuroda said, the monetary policy is not about limits, yet about the costs versus the benefits as all public services.

Of course, the ECB meeting and President Mario Draghi’s press conference should trigger decent price volatility in the euro markets in the afternoon. The dovish ECB expectations should keep the gains limited heading into the meeting, while the ECB decision should give a clearer direction to the euro in the short-term. Breaking above the 1.1340, the EUR/USD could gain enough momentum to target 1.1500, before 1.1616 (2016 high). Clearing the 1.1122-support (Aug 31st low), the EUR/USD could extend weakness to 1.1045 (Aug 4th low) before 1.1000.

What Are ECB's Policy Options?

Related Articles

Michael Pento
Recession Questions Answered By Michael Pento - Jun 28, 2022 2

President Joe Biden, Treasury Secretary Janet Yellen, the entirety of the money printers who inhabit the Federal Reserve, and virtually all of the deep state of Wall Street are...

Antonio Ferlito
Is This A Fake Market Rebound?   By Antonio Ferlito - Jun 28, 2022 1

The EU and US futures are slightly up at the time of writing. The Wall Street rally continues and is inspiring stock exchanges in the Asia Pacific and Europe, all up at the start...

What Are ECB's Policy Options?

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at’s discretion.

Write your thoughts here
Are you sure you want to delete this chart?
Post also to:
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Are you sure you want to delete this chart?
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
Sign up with Email