ECB's Schnabel says a premature removal of ECB support would be a great mistake though financing conditions remain favourable; the economy has reached a turning point and the short-term outlook has improved

• Recent yield increase is a factor of the improved outlook "precisely what we would expect and want to see"


• The remaining PEPP envelope is quite large, does not impose restrictions on decisions and it is not an appropriate time to discuss an increase
  


• In June we’re going to look at the drivers of financing conditions, we are going to consider additional aspects such as seasonality, and we’ll analyse the inflation outlook. This joint assessment will then determine what is going to happen with our asset purchases.


• Says, PEPP will end when its goal of offsetting the negative pandemic impact on inflation has been achieved. We are not seeing this yet.
  


• It's likely that when the PEPP ends we will not have reached the inflation goal and as such will continue to run a highly accommodative monetary policy


• PEPP and APP are separate programmes and serve different purposes.


• Is 'quite sceptical' on AIT; theoretically, it is appealing but could cause unintended asymmetry. Implementation and communication of this is also difficult. "I personally don’t think we should follow such a strategy."


• "...currently no need to discuss adjustments to the tiering multiplier"


• "At the current time I don’t see the need to adjust the deposit facility rate."


• Pandemic is far from over from a health and economic perspective


• Link to release

Reaction details (07:37)

• Prior to this commentary, the Bund Jun'21 contract came under pressure dropping to fresh session lows beneath yesterday's trough of 169.68.


• Following the commentary, we saw a very modest continuation of this downside as Schnable endorses the increase in yields though the Bund still remains supported above the 169.50 mark at present.

Analysis details (07:42)

• Such remarks follow and contrast the views of her Executive Board counterpart Panetta who, on Wednesday, remarked that financing conditions are tightening - while Schnable seemingly takes a more upbeat/balanced view stating they 'remain favourable'. However, the differing views are perhaps not too surprising as the April Minutes stated that "Some caution was voiced, given that risks to wider financing conditions remained." and members agreed the next chance to assess this would be June (June 10th is the next meeting).


• Going into the June gathering focus is firmly on the update to the PEPP programme as we saw, in March, a significant increase in the purchase pace which means that at the current pace of PEPP (circa EUR 80bln/month) the remaining envelope would not be sufficient for the current March 2022 end-date. However, Schnable says now is not the time for a discussion around the envelope. As such, focus will be on whether the pace reduces and if so does the reduction take us back to the pre-significant increase figure i.e a normalisation or is it a more substantial decrease/taper.


• As a reminder, Schnabel is the head of the ECB's market operations and as such her commentary around PEPP is always notable.

28 May 2021 - 07:31- Fixed IncomeImportant- Source: Newswires