SG on central banks' 'tightening by stealth' (and they single out the ECB specifically)

Author: Eamonn Sheridan | Category: Central Banks

This from Société Générale, of particular interest ahead of the European Central Bank minutes today (preview of this here - spoiler is to watch for QE tapering discussion)

The global price action over recent weeks is consistent with fiscal demand-led expansion
with unfunded tax cuts in the US
  • and increases in budget deficits in Italy and even Germany
That is helping risk markets, with equities reaching new highs, but it is a worry for bondholders, and rightly so.

 ... Central banks lately have been on the sidelines, not wanting to upset any apple carts.
  • We have been seeing signs of tightening by stealth, particularly so for the ECB.       
More on ECB stealth tightening  SG FI analysts
ECB communication is trying to downplay upcoming base effects that are expected to drive headline euro area inflation below 1% in 1Q18.
ECB is preparing to announce a reduction in the volume of asset purchases on 26 October
  • BdF's Villeroy de Galhau: "We should on the one hand exploit the margins of flexibility of the programme and on the other hand hold in reserve an additional purchasing capacity - if needed". He added that "the academic literature provides consistent evidence that the impact of asset purchase programmes on the yield curve and asset prices is primarily driven by the total stock of assets held by the central bank (the so called 'stock effect'), rather than by the flow of transactions conducted over a given period ('flow effect')".
In parallel, the ECB's commitment to reinvest maturing bonds will be attenuating the net flow impact of lower purchases. This doctrine, downplaying the flow effect of QE, if widely embraced by the ECB's Governing Council, would make it easier for the ECB to taper more aggressively.

ECB tightening by stealth on the regulatory front
  • The ECB last week talked about tightening collateral
  • And this week a supposed ECB draft report foresees greater obligations on banks to raise bad debt provisions
  • The ECB announced last year (here) modifications to its risk control framework for collateral assets.

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