At last month’s meeting, the ECB unveiled its much-awaited bond-buying program, dubbed Outright Monetary Transactions (OMT).The announcement of the plan has served to keep government borrowing costs in check as market participants await a request from Spain for a formal bailout, which is a prerequisite for activating any sort of ECB bond market intervention through OMT.
So, what is expected from the ECB today, given that they’ve already unveiled their plan, and everyone is waiting on Spain?
Clarification on the details of OMT, mostly.
There are two details BofA Merrill Lynch economist Laurence Boone says the ECB could help clear up:
The ECB clarified the modus operandi of the OMT in a recent press release but failed to provide details on: 1) what it deems to be appropriate yields; and 2) how it can proceed with bond purchases in the 1-3 year range without distorting sovereign debt duration.
Although the ECB will likely intervene to keep yields within a range that preserves debt sustainability, it is unlikely to reveal its preferences ahead of a country applying for support, to preserve as much room to manoeuvre as possible when intervening.
The ECB may provide some clarity on the duration dilemma. We do not expect the ECB to purchase only the bonds that were issued primarily before the OMT program. The available stock of these bonds would likely be small as a significant share of the bonds maturing by year-end 2015 may have been purchased under the SMP program during the 2011 summer turbulence. A significant share of these bonds may be pledged as collateral at the ECB. An alternative would be for the ECB to request an issuance program as part of an MoU, thus ensuring that the country preserves the duration of its debt and does not focus issuance in the 1-3 year sector.
One thing Boone doesn’t expect from the ECB, however – lower refi or deposit rates.
Citi economist Jürgen Michels agrees, saying the ECB won’t change rates in October. But he does seem them leaving the door open for a rate cut soon, writing in a recent note, “In the press conference, ECB President Mario Draghi probably will highlight downside risks for the economic outlook. In our view, this would suggest that the ECB is leaving the door open for a reduction in the refi rate in 4Q, despite elevated inflation rates.”
So, markets can probably expect little clarification on OMT bond market intervention and no changes to rates on Thursday.
Michels says there is one thing the ECB could do to shake things up, though:
In our view there is only one area in which the ECB might come up with major change of the status quo: the rules on the publication of the minutes. In recent weeks, several ECB Governing Council Members, including Austrian Governor Nowotny and German Governor Weidmann, have signaled their support for a timely publication of the ECB minutes. In that respect it might well be that in order to increase transparency with regards to the decision-making process behind the ECB’s policy decisions, the Governing Council will decide to publish the minutes a few weeks rather a few decades after the meetings.’
The ECB announcement will come at 7:45 AM ET tomorrow, followed by the press conference at 8:30 AM. We will have LIVE coverage here on Money Game >