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ECB: A strongly targeted policy response – Deutsche Bank

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Mar 17, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    Research Team at Deutsche Bank, suggests that contrary to the market response, they are positive on the ECB's latest easing measures.

    Key Quotes

    “There were upside and downside surprises on individual policy measures but in net terms there was a positive surprise in the latest policy easing package. It is a strong attempt to debunk the argument that the ECB has run out of room for maneuver and amounts to a comprehensive and targeted credit easing package. It leans against the risks of tighter lending standards and the downside risks to growth, with particular support for the periphery. The focus is on domestic credit easing, not on ways to weaken the currency. Last but not least, the ECB improved the interaction between its unconventional monetary policies. This is an important and overdue development.

    Three elements of the package exceeded expectations. First, QE increased more than expected. Second, corporate bonds have been added to the asset purchase programme. Third, and most importantly, TLTRO2 has both a conditional and an unconditional component. There were also elements that disappointed expectations. First, there was no deposit rate tiering. Second, the signal is that rates may not fall any further. Third, the yield floor was neither relaxed by deposit rate tiering nor removed.

    The net impact is positive, in our opinion, with a clear differentiation across countries and assets. First, we believe the package targets the periphery more than the core. This makes sense given the larger output gaps and unemployment rates in the periphery versus the core. Second, it targets domestic demand more than external demand. The focus is on credit easing, not on ways to weaken the currency.

    The ECB is being a good G20 citizen, maximizing the internal dimension of policy transmission rather than going down the road to a competitive currency devaluation, which in a disappointing global growth environment is probably a zero sum game. These two complementary factors lead to a more targeted policy.”
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