27 Jul 2018

ECB declines to clarify its rate guidance

At its meeting yesterday, the ECB’s Governing Council (GC) left its key interest rates unchanged with the deposit rate left at -0.40%, the main refinancing rate at zero and the marginal lending rate at +0.25%.

That came as no surprise to markets whatsoever and indeed was in line with our own forecast. On Quantitative Easing (QE), the ECB statement confirmed existing plans to stop net purchases at the end of December, with the ECB intending to reduce the pace of asset buying from €30bn per month currently to €15bn per month after September, provided the data evolves in line with expectations. Overall, the press conference had a holiday feel to it, in sharp contrast to the historical moment which took place exactly 6 years ago to the day, when President Draghi pledged to “do whatever it takes to preserve the euro”. That statement was surrounded by drama, with the ECB Chief’s comments proving to provide a crucial turning point for euro sentiment, in the midst of much speculation over the single currency’s future.
 

Forward guidance
 

The ECB’s interest rate guidance set out at its June 2018 meeting was repeated yesterday. That is that the GC “expects the key ECB interest rates to remain at their present levels at least through the summer of 2019”. A key question for yesterday’s watching press was what this actually meant following some conflicting steers from GC members; could the GC opt to raise rates as soon as July 2019, or would it wait until September 2019? On this President Draghi said he felt no need to clarify the guidance. He did however state that money market expectations, which point to a later rather than earlier hike, aligned “very well” with the GC’s view. Furthermore, Mr Draghi highlighted that the English version of the ECB’s guidance was “the only version that conveys the policy message”. Following these steers, we remain comfortable with our view that we expect to see the first hike in the deposit rate (+20bps to -0.20%) in September 2019.
 

Market reaction
 

For currency markets, Mr Draghi’s remark that markets were very well aligned with GC expectations was enough to send the euro lower, with that comment seemingly putting to bed the debate over whether the first move on rates could come as soon as July 2019, sooner than markets had expected. Indeed, the euro has since fallen to $1.1660 against the USD, from around from $1.1720 just ahead of the press conference. EURGBP was little changed throughout the event. The next ECB meeting takes place on the 13 September at which we expect the GC to confirm it plans to go ahead and halve its pace of QE buying to €15bn per month, from the end of September.
 

Brexit negotiations update
 

Michel Barnier, the EU’s Brexit negotiator, met with the new UK Brexit Secretary Dominic Raab yesterday. The statement issued and press conference that followed indicated that the two sides had held constructive talks. But they also served as a reminder of the work still to be done and the conflicts to be resolved. In particular one issue is that Mr Barnier said Prime Minister Theresa May’s backstop proposal for avoiding a hard border between Ireland and Northern Ireland - by keeping the UK inside the single market for goods and agricultural products on a temporary basis - would break the EU’s red lines. Specifically he doubted it could be done “without putting at risk the integrity of the customs union, our common commercial policy, regulatory policy and fiscal revenue”. The two sides are now set to try and “bring new energy to the talks” with the statement saying they both “want to conclude in October” still, though clearly this looks ambitious. Their next meeting is set to take place in mid-August.
 

ICG: The Ulysses is back
 

Yesterday saw the Ulysses, ICG’s largest ship, return to duty on the Irish Sea. The ship had been taken out of service due to technical problems which have now been resolved. Such news will be welcomed by the market as the Ulysses is the powerhouse behind the Group’s performance. It should also put the company on a more solid footing when it reports its H1 results on August 30th.
 

Irish Economy: NTMA cancels the last of the 2047 Treasury Bond
 

The NTMA announced yesterday that it has cancelled the final €500m of the Irish FRB that had been due to mature on 18 June 2047. This debt was linked to the landmark IBRC transaction in 2013, which was a major milestone on the road to Ireland’s return to creditworthiness. To date the NTMA has repurchased €12.0bn (nominal) of the €25bn of bonds issued as part of the ‘Prom Note’ deal, with €2.5bn of these repurchases taking place since the start of this year. All of the bonds were held by the Central Bank of Ireland, whose holdings have previously attracted adverse comment from the ECB relating to monetary financing concerns, although Frankfurt has since acknowledged the progress made in reducing the stock of IBRC-related assets. While the effective servicing cost of the IBRC-related bonds is immaterial (as the Central Bank repatriates most of its profits to the Exchequer), the repurchases serve to improve the optics of Ireland’s headline debt metrics. This latest buyback, like its predecessors, is helpful in terms of marginally improving Ireland’s headline debt/GDP metrics.
 

AIB Group: Interim results in line with expectations
 

AIB released its H1 2018 interim results this morning, coming in broadly in line with our expectations. Headline items included a Profit Before Tax of €762m, EPS 23.3c, NII €1,061m, Other Income €322m, NIM 253bps, FLCET1 17.6%, and cost/income at 51%. Non-performing exposures (NPEs) fell €1.7bn q/q to €7.5bn, a sharp reduction but expected given the Project Redwood disposal, and NPEs are now 12% of gross loans, while there was a net credit write back of €130m (but an additional €140m included in exceptional items related to the Redwood NPL disposal and a further €40m included within the NII line for suspense interest). Mortgage market share at 32% in H118 suggests it remains under some pressure as we expected given the heightened competitive dynamics seen in the market this year, while there was an additional €32m provision taken against the tracker mortgage issue, and this still not fully closed off yet. Total new lending in the half was €5.5bn, with a very strong performance in WIB (w’sale/institutional) unit of €1.9bn. Gross loans now €62.8bn, net loans €59.9bn, though SME lending continued to fall marginally.
 

Economic releases
 

13.30 US GDP Annualised QoQ