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ECB Preview: Draghi To Address Bond Scarcity, Stress Full PSPP Implementation

As expected, the ECB kept all rates unchanged at its April policy meeting and now that the formalities are out of the way, all eyes turn to Mario Draghi who we assume will field quite a few questions about how he thinks the central bank is doing when it comes to monetizing the entirety of EGB net issuance on the way to breaking euro money markets and sending every piece of government paper that isn’t issued by Athens careening into NIRP-dom. Here’s Goldman’s recap of PSPP so far and their preview of the presser:

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Via Goldman:

Since March 9, when the ECB also started buying sovereign bonds, the ECB purchased a total of €52.5 billion of bonds issued by Euro area governments and some €8.5 billion of private sector debt, totaling the ECB's €60 billion monthly target of debt purchases.

ECB preview: Steady as she goes

Bottom line: We expect no change to the ECB's monetary policy stance at the April Governing Council meeting and no indication for a change in the policy stance any time soon. More specifically we expect:

Key ECB policy rates to be left unchanged.

Re-confirmation of the deposit rate of -20bp as the effective lower bound for the rate on the ECB’s deposit facility (which provides the floor for overnight rates and the yield at which sovereign debt is bought under the asset purchase programme).

Acknowledgment of the improvement in the economic outlook …

… but also a strong signal that the implementation of the expanded asset purchase programme is needed to ensure that the positive outlook indeed materialises.

I. The April meeting: Steady as she goes

The ECB Governing Council meets for its regular monetary policy meeting on Wednesday 15 April. Interest rate decisions will be announced at 12:45pm, with President Draghi's regular press conference starting at 1:30pm (all times London). The official account of the meeting will be published four weeks after the meeting.

The Euro area economy has clearly gained further momentum since the beginning of the year. The Governing Council will acknowledge this improvement in the prepared statement, as will Mr Draghi in his answers at the press conference. We think, however, that the statement will also caution against taking the upswing for granted given a wide range of potential risks. In particular we expect either the prepared statement or Mr Draghi during the press conference to stress the need for the full implementation of the expanded asset purchase programme as an important condition for the positive growth and inflation outlook to materalise. The accounts of the March meeting noted in this respect that "It was underlined that for the baseline scenario to materialise the expanded APP had to be fully implemented and supported by appropriate communication". It is also the case the accounts showed skepticism among some Governing Council members with respect to the 2017 ECB staff projection for inflation that foresee inflation going back to 1.8% that year.

When asked during the press conference whether the ECB might encounter scarcity for some bonds and hence may be forced to adjust some parameters of the programme, we expect Mr Draghi to express his confidence that the Eurosystem will not have any problems to implement the programme in full.

Mr Draghi, we think, will also reconfirm in that context the main parameters of the programme and the eligibility criteria for bonds to be purchased. While some more recent comments form Governing Council members point to concerns that the current pace of sovereign purchases may be excessive, we expect Mr Draghi to highlight the importance to be predictable in order to evade any uncertainty on the side of market participants and ultimately unwanted volatility in financial markets.

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