The post-ECB wrap from Barclays
As we expected, the ECB stood on hold after the July monetary policy meeting: official interest are unchanged, the Asset Purchase Programme will continue at the same pace over the same time-horizon, ie. at least until the end of March 2017.
President Draghi did not make any unexpected announcement and focused the market's attention on the next meeting, in September, when there the ECB will have more information on the fallout of Brexit and the potential need for additional monetary policy measures.
Our views for September.
We think the most likely option for the ECB is to extend QE beyond March 2017, possibly by 6-9 months. We do not rule out further depo rate cuts either, although we think these are less likely.
As we discussed in April, the negatives of any further sizeable cut to the depo rate would far outweigh the positives, in our view. The ECB could also increase the size of monthly APP purchases but we think it would unnecessarily introduce further distortions in the EGB market, which we believe the ECB may want to avoid. On the other hand, the QE extension would be able to mitigate some of the headwinds to domestic demand from Brexit. For instance, without the March package and the nine-month extension that we expect for September, we estimate flat 2017 euro area growth due to Brexit. Should the negative shock from Brexit be eventually larger than we expect, the ECB may be forced to ease policy further in 2017. In that case, we believe an extension of the pool of eligible assets to the APP would be necessary, and we see bank loans as the best candidate for such an extension.
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