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Currently, the total amount of the eurozone’s NPLs is estimated at $1 trillion. However, undercapitalized Italian banks are objecting  to such ECB recommendations.
Currently, the total amount of the eurozone’s NPLs is estimated at $1 trillion. However, undercapitalized Italian banks are objecting  to such ECB recommendations.

ECB Poised to Outline Pace of Bond Buying

Lower bond yields suggest overall market volatility will decline, spurring demand for assets and draining the non-financial sector, as well as stock markets of investment capital

ECB Poised to Outline Pace of Bond Buying

The European Central Bank is poised to start wrapping up its unconventional monetary stimulus as early as this coming week. Policy tightening, albeit extremely gradual, will affect the common currency and bond valuations across the bloc.
With access to borrowing slightly restricted, gross domestic product growth across all euro economies is likely to slow, whilst overall economic sustainability is expected to improve, Sputnik reported.
ECB chief Mario Draghi says Thursday’s meeting of the central bank policy board will decrease the scale of the regulator’s monthly bond-buying program, whilst the regime of negative and zero-interest rates will remain in place for roughly two more years.
This would make the ECB’s era of unconventional monetary stimulus the second-longest in history–next to the Bank of Japan’s. However, Draghi also urged economy ministers from member-countries to promote reforms aimed at greater openness and open market-orientated competitiveness–in order to soften the challenges to growth posed by the tightening monetary environment.
The ECB is currently buying  €60 billion ($70.7 billion) worth of bonds per month and the pace of central bank bond-buying will decrease. Complimentary fiscal policy measures would also help, but the eurozone is lacking a coordinated fiscal policy across its member states. That said, each nation will react to changes in the single monetary policy as deemed appropriate. This could create greater economic imbalances within the bloc, and a renewed struggle for intra-eurozone competitiveness.

Slow Tapering
The ECB is expected to downscale its monthly bond purchases to €40 billion at its policy meeting on October 26.
"For example, €20 billion per month would imply that QE could immediately end once the extension is complete. In contrast, €40 billion per month is far more likely to require a further taper," Citibank said in a note.
Citi analysts expect a strong market reaction to the ECB’s tapering of its accommodative measures, with the 10-year Deutsche Bund yield easing as much as 0.25%, reflecting the increase in the note’s value. The 10-year Bund yield would thus retreat to 0.70%, its 2015 level.
Lower bond yields suggest overall market volatility will decline, spurring demand for assets and draining the non-financial sector, as well as, stock markets, of investment capital. This could entail negative consequences for overall economic expansion.
The Eurozone’s economy grew by 2.3% in Q2, compared to 1.5% in the UK, which is nearing its first interest rate hike in over a decade due to rapid inflation.
However, Citi analysts point out, in case of a more hawkish tapering in ECB bond purchases, the 10-year Bund yield could rise by 0.15-0.20%, reflecting a sell-off in debt securities, and spurring fixed investment in  non-financial sector and stocks. This could actually bolster the eurozone’s economy in the near-term.

ECB Under Pressure
Besides, the ECB is facing increased pressure to crackdown on non-performing loans, in order to stave off possible risks to the stability of the European banking system. The ECB’s Single Supervisory Mechanism observed that NPLs are still on the rise, following Italy’s banking problems of late 2016-early 2017.
The regulator said commercial banks should set aside part of their own capital (in the form of non-binding reserve-ratio requirement), in order to have resources for extinguishing any looming issues stemming from their NPL inventory.
Currently, the total amount of the eurozone’s NPLs is estimated at $1 trillion. However, undercapitalized Italian banks are objecting to such ECB recommendations.
Nonetheless, the stiffening of central bank monetary policies looming large on the horizon will challenge commercial banks’ ability to address the emerging risks by increasing their own borrowing from the ECB.
Despite the low scale of planned ECB policy tightening, it is already stirring significant market anxiety, meaning the coming week will be a volatile period for the eurozone stocks, the euro and non-financial investments.
Meanwhile, some economists think the ECB will buy bonds for much of 2018, say to at least September, albeit at a reduced speed of about €20 billion to €30 billion a month, down from its current pace of €60 billion.
The “slow taper” scenario is probably the most favored in the market, enabling Draghi to put off rate rises until 2019. The ECB’s main preoccupation is an inflation rate that is stubbornly below target. A taper that gets the market excited would drive up the euro and make that inflation challenge even steeper.

 

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