ECB: Trying to buy time
! Yesterday’s (August 4) monetary policy meeting was a mixed bag. On the more positive side was the fact that the ECB
acknowledged the increased stress in money and bond markets. On the more negative side was the fact that it shied away
from addressing the stress in the bond market in a more decisive fashion.
! The funding stress was dealt with by re-introducing a supplementary six-month long-term refinancing operation (LTRO).
This is the second time the ECB re-introduces a six-month fixed rate, full allotment funding after having phased it out. The
first time was in May last year on the back of tensions created by the sovereign debt crisis.
! In addition, the ECB also brought forward by one month the announcement concerning details of its other refinancing
operations.
! When it comes to bond purchases, all the ECB delivered was a repeat of last December. While president Trichet was
speaking and remarking that the programme remained ongoing, the Eurosystem reportedly was buying Irish and
Portuguese debt. This is the first time the ECB has been back in the market since the end of March. But in contrast to last
December, when sovereign bonds were bought of countries that were under pressure, this time the ECB steered clear of
purchasing Italy and Spain, which are the ones under pressure now.
! This is a dangerous game, in our view. The ECB is trying to stay clear of the larger bond markets, probably preferring to
leave them in the hands of the EFSF once it becomes operational. But the tactic to buy smaller peripheral markets to buy
time seems to be backfiring already, with Italian bond prices falling sharply after initially rising on the back of reported ECB
buying.
! As we anticipated, the ECB stuck to the language that keeps the door open for another rate increase by stating that inflation
risks remained on the upside and that the risks were monitored very closely.
! By now, the combination of weak economic data and dysfunctional markets puts the risk on lower, rather than higher, rates
in our view.
! Please see the full report for our Fixed Income Strategy & FX Strategy views.
! Yesterday’s (August 4) monetary policy meeting was a mixed bag. On the more positive side was the fact that the ECB
acknowledged the increased stress in money and bond markets. On the more negative side was the fact that it shied away
from addressing the stress in the bond market in a more decisive fashion.
! The funding stress was dealt with by re-introducing a supplementary six-month long-term refinancing operation (LTRO).
This is the second time the ECB re-introduces a six-month fixed rate, full allotment funding after having phased it out. The
first time was in May last year on the back of tensions created by the sovereign debt crisis.
! In addition, the ECB also brought forward by one month the announcement concerning details of its other refinancing
operations.
! When it comes to bond purchases, all the ECB delivered was a repeat of last December. While president Trichet was
speaking and remarking that the programme remained ongoing, the Eurosystem reportedly was buying Irish and
Portuguese debt. This is the first time the ECB has been back in the market since the end of March. But in contrast to last
December, when sovereign bonds were bought of countries that were under pressure, this time the ECB steered clear of
purchasing Italy and Spain, which are the ones under pressure now.
! This is a dangerous game, in our view. The ECB is trying to stay clear of the larger bond markets, probably preferring to
leave them in the hands of the EFSF once it becomes operational. But the tactic to buy smaller peripheral markets to buy
time seems to be backfiring already, with Italian bond prices falling sharply after initially rising on the back of reported ECB
buying.
! As we anticipated, the ECB stuck to the language that keeps the door open for another rate increase by stating that inflation
risks remained on the upside and that the risks were monitored very closely.
! By now, the combination of weak economic data and dysfunctional markets puts the risk on lower, rather than higher, rates
in our view.
! Please see the full report for our Fixed Income Strategy & FX Strategy views.
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