23 February 2017
Reporter: Drew Nicol

DB: No light at end of the tunnel for EU repo

Hard pressed European repo desks should not hold out hope of respite from the European Central Bank’s (ECB) bond purchase programme in March just because inflation rates are on the rise, according to Deutsche Bank analyst Jochen Möbert.

“At the March meeting, despite the recent increase in the overall inflation, the governing council will hardly be willing to signal a possible 'tapering' of the bond purchases,” explained Möbert in a Deutsche Bank research note.

“At best, it formulates more specific conditions under which a reduction in bond purchases could occur. We expect the announcement of a return or the modification of the bond purchases to continue until June at the earliest. However, the ECB could very well already make a slight shift in its comments in March.”

Jochen cited the fact that the core inflation rate had risen by 1 percent, along with wage growth and a strong euro, as all positive indicators that economic recovery was underway, but stopped short of claiming the end of the ECB’s price management policies.

The ECB's current monthly pace of €80 billion for its asset purchase programme will be maintained until the end of March 2017, at which point the monthly target will drop to €60 billion, until the end of December 2017.

The prediction will come as a blow to EU repo market participants, who are voicing increasing frustration with the ongoing asset purchase programme that brought the market to its knees in later 2016 and is threatening to shut down month-end liquidity in the near future.

It its latest repo report, the International Capital Market Association (ICMA) described how the European repo market experienced extreme volatility and dislocation during a year-end liquidity crunch in 2016.

ICMA’s European Repo and Collateral Council has warned that “[The repo market stress] could heighten risks related to banks’ and firms’ ability to meet margin calls, which in turn could have systemic consequences.”

The council described how a perfect storm of post-crisis regulation, the financial policy of central banks, along with other global market trends, are “very much acting in confluence to precipitate the perfect storm”.

ICMA has also made repeated calls for the ECB to allow for the securities lending programmes of central banks, which is dictated by the ECB but managed at a regional level, to be expanded to combat liquidity issues.

ECB representatives attempted to ease the concerns of the repo industry over its controversial monetary policy during the Deutsche Börse Global Funding and Financing Summit in January.

Conference keynote speaker and ECB board member Yves Mersch acknowledged the negative effects of the central bank's "unconventional monetary policy", but argued that the European repo market, by its very nature, is procyclical and so will continue to suffer for as long as it takes for the overall economy to recover.

"The current market has made unconventional measures necessary on an unprecedented scale. But they are temporary," Mersch said.

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