ECB: Déjà vu all over again as more easing on its way – Rabobank

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Jan 22, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Delhi) – Elwin de Groot, Senior Eurozone Strategist at Rabobank, notes that yesterday the ECB President Draghi hinted at further easing measures in March.

    Key Quotes

    “This was clearly supported by Draghi’s comment that “today, we did not want to determine specific instruments, but rather to assess the current and correct stance.” This will give the Council more flexibility in the run-up to the March meeting and also lowers the risk of markets ‘getting carried away’ with it.

    Draghi argued that past policy measures “are working”, that recent indicators point to ongoing real GDP growth momentum into 2015Q4 and that the ECB expects the economic recovery to proceed this year, supported by monetary policy, low oil prices and a slightly expansionary fiscal stance. However, he emphasized that “downside risks to the outlook have increased again amid heightened uncertainty about emerging market economies’ growth prospects, volatility in financial and commodity markets, and geopolitical risks” and that inflation dynamics had also deteriorated, requiring the ECB to “review and reconsider” its monetary policy stance in early March, when the next staff projections become available.

    In the Q&A session, Mr. Draghi explained that although the measures taken in December were entirely appropriate given the circumstances at that time, the effective exchange rate, oil prices and growth prospects of emerging markets all had deteriorated significantly, thus requiring a rethink.

    To strengthen that message, Draghi said that the Council has the “power, willingness and determination to act”, that “there are no limits to how far we are willing to deploy our instruments within our mandate in order to reach our goal“, and that the Council was unanimous with this line of communication.

    We therefore believe that action in March is all but certain. We stick to our view that a cut in the deposit rate (-10bp, but with the probability skewed towards a larger cut) will prove the path of the least resistance in the near-term.

    With regard to the purchase program, the ECB doesn’t look ready yet to further expand this on short notice, even though Draghi said that “work would be carried out to ensure that all the technical conditionals are in place to make the full range of policy options available for implementation, if needed.”

    Indeed, the Governing Council seemed underwhelmed by the reaction to the December extension of the purchase program: the statement emphasized that the decision in December to extend the monthly net purchases of EUR60bn by six months and reinvest principals would add a significant amount of liquidity to the banking system. Draghi later added that the impact and size of this measure had not been sufficiently appreciated.

    However, looking beyond March (say, June), we think the purchase program is likely to become the preferred candidate for action should economic and financial conditions have further deteriorated (which obviously is a ‘live’ scenario). This would be even more so, should the negative deposit rate regime start to have tangible side-effects.”
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