5 Questions Ahead of the ECB’s July Meeting

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Fireworks will explode across the U.S. on July 4th, but don’t expect any from the European Central Bank Thursday. They set theirs off last month with rate cuts and bank-lending measures.

Still, ECB chief Mario Draghi may be pressed to provide details on lending programs and  preparations to purchase asset-backed securities. With inflation at 0.5%, well below the ECB’s 2% target, Mr. Draghi already faces calls to do more.

Here are five key questions heading into Thursday.

#1: Will There Be Any More Detail on Long-Term Loans?

ECB watchers will be eyeing any new information on the four-year bank loans announced in June, specifically how the ECB plans to ensure they find their way to businesses. Under the program, banks failing to boost lending must repay the loans early, but this still gives them a “a two-year window for carry trades,” said UniCredit economist Marco Valli, referring to the practice of borrowing at low rates and investing in higher yielding government bonds.

#2: And On the Asset-Backed Securities Plan?

In June, Mr. Draghi said that the ECB would “intensify preparatory work” on purchases of bundled loans. It probably won’t be ready to do this for many months, but could provide an update on its plans. “ABS buying will come when regulation has changed and loan transparency is a given. We believe this is unlikely” before early next year, said Astrid Schilo of Exane BNP Paribas.

#3: What’s the Forward Guidance Now?

Mr. Draghi has signaled rates will stay super low for up to four years. This would likely put the ECB far behind the Fed and Bank of England on rate hikes. Thursday’s meeting may reveal how widely Mr. Draghi’s view is shared within the 24-member rate board.

#4: What Will Mr. Draghi Say About Quantitative Easing?

A large-scale program of private and sovereign bond purchases remains an option and the IMF has urged the ECB to consider it. But officials are likely to hold off for now given resistance in Germany. Still, the ECB may provide clarity on the triggers it has in mind on launching QE.

IMF Managing Director Christine Lagarde
IMF Managing Director Christine Lagarde
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#5: What Will the Euro Do?

The euro fell after the ECB announced its easing steps on June 5 but the drop didn’t last, raising pressure to do more to weaken the currency and boost exports and inflation. “The euro is overvalued, which is bad for our industry and our growth,” French Prime Minister Manuel Valls told Les Echos. Look for Mr. Draghi to be pressed Thursday on whether he shares France’s concern.

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Source: blogs.wsj.com

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