ECB July Meeting

As widely expected, the ECB meeting did not introduce any new monetary policy measures. Indeed, the Governing Council left the key ECB interest rates and the pace of asset purchases unchanged at its July policy meeting :

• Main Refinancing: 0.05%
• Deposit Facility: -0.20%
• Marginal Lending Facility: 0.30%

PSPP programme and Rate:

• The ECB said that it would continue its private-sector purchase programme (PSPP) at least until September 2016 and, indeed, as long as it took to restore medium-term price stability.
• It confirmed that the Governing Council was ready to do more, if needed, but would act only in accordance with its mandate.

The economy:

• The ECB did not say much that was new in its assessment of the monetary and economic outlook for the euro area. The Governing Council assessed that “recent data are still consistent with a moderate recovery in the euro area and gradual return of inflation towards the 2% target over the forecasting horizon, despite the Greek turmoil and recent financial market developments.”
• Chairman Draghi noted that the modest growth trend, supported by an accommodative monetary policy and lower commodity prices, was in line with ECB expectations.

Greece:

• Following the successful agreement between Greece and its creditors on 13 July, the ECB announced that the ELA ceiling for Greek banks had been increased by EUR 0.9 bn to EUR 90 bn for a week, with no change in the collateral requirements governing this liquidity provision.
• Regarding capital controls, Draghi indirectly stated that these would stay in force for the time being. “The ECB and the Bank of Greece will assess the liquidity needs of the Greek economy, yet limit the risk of a bank run in the near future.” Draghi added that it was the responsibility of the Greek government to introduce and lift capital controls.

For now, the ECB has decided to keep the road map unchanged.

MARKET IMPACT

ECB measures

• The main focus of the ECB is economic recovery rather than market conditions. Accordingly, it will maintain an accommodative stance until inflation reaches its 2% target.
• Unconventional as well as conventional measures (TLTRO, the PSPP programme and the negative deposit rate) will anchor euro zone government bond yields in negative or low-level territory.
• All these measures will maintain high-excess liquidity in the banking system, which would lower the short-term rate and put pressure on our benchmark (the Eonia).

Money Market Investment strategy

Once again, this meeting confirms that monetary policy will remain accommodative for as long as necessary. Our funds are oriented in this direction to outperform our benchmark under the following market conditions:

• Optimal rate and credit duration allocation on longer maturities.
• Overweight Credit and search for better-yielding issuers (with a minimum short-term rating of A2/P2).

Pierre Boyer
Head of Money Market fund management