European Central Bank this week is set to give its first verdict on euro area monetary policy since the Brexit decision. Like the BoE’s MPC meet last week, the ECB’s meet will also likely be a non-event. Having only recently announced another stimulus package, the central bank will likely wait until the following meeting in September – when it will have new updated forecasts – to decide to act again.
Nevertheless, the markets will be watching closely for what President Mario Draghi has to say at his press conference. In a recent address to EU leaders, Mr Draghi warned that the UK’s withdrawal from the EU could deduct 0.5 percent from euro area GDP growth over the next three years.
“With Draghi having already judged that the euro area economic outlook has likely deteriorated somewhat in response to the Brexit vote, we suspect the Governing Council might well decide to extend the ECB’s asset purchase programme beyond next March, probably by six months to September 2017,” said Lloyds Bank in a report.
Given that the yields on well in excess of €1trn of securities that would otherwise be eligible have now fallen below the floor of -0.40 percent, the ECB currently faces a shortage of bonds that it can buy under its asset purchase programme. The Governing Council could make some amendments to the rules governing the ECB’s QE programme.