ECB meeting is the big event this week - BBH

Research Team at BBH, suggests that the big event ahead of next week’s FOMC meeting is this week's ECB meeting. 

Key Quotes

“This is a live meeting in the sense that policy announcements are expected to be forthcoming.  What is at stake is not interest rates.  The deposit rate will likely remain at minus 40 bp.  Instead, decisions are needed about its asset purchases.”

“First is extending the program past the current soft end-of-March time frame.  Most are focusing on a six-month extension, mostly on the basis that that was the length of time of the previous extension.  The challenge here may be to do it in a way that makes it clear that it is not an open-ended program.  There are many ways that this can be achieved, and verbally by Draghi is one such way.  There is some speculation that the ECB could scale back the amount of monthly purchases (currently 80 bln euros).  If this does materialize, we suspect it may be an operational tweak in the covered bond purchases.”

“Second is adjusting the decision-making rules about the purchases.  The capital key, which is currently being used, is based on the relative size of the economy so that the larger the economy, the greater amount of bonds the Euro-system buys.  This is an important principle and one that is most unlikely to be jettisoned as some have suggested.  Instead, we suspect the ECB can modify some of its own rules, like the individual issue cap.  The ECB may also apply the minus 40 bp floor on the portfolio level rather than the individual security level, and this too would overcome or minimize the scarcity operational challenge.”

“Third is measures relating to the securities lending program to address the stress in the repo market.  The idea here is that when the ECB buys securities, it not only removes the securities as an investment vehicle but also as collateral.  The ECB and the national central banks have securities lending programs, but they are not particularly user-friendly.  There has been some speculation that the ECB will take measures to improve its ability to provide the securities it buys back to the market.”