ECB Preview: 10 Major Banks expectations from ECB’s take two on Easing

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Mar 10, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    We are just a few hours away from the most challenging central bank meeting in living memory. The following are the expectations as forecasted by the economists and researchers of 10 major banks. After last meeting’s package of measures and introduction of negative rates and as a consequence of the renewed weakness of inflation and its potential impact on long-term inflation expectations, all the 10 major banks are expecting Mr.Draghi to announce a number of additional easing measures including the a further 0.10-0.20 percentage point reduction in the deposit rate, a further extension of the duration of the QE programme, and to increase the amount of monthly QE purchases.

    Goldman Sachs

    As a consequence of the renewed weakness of inflation and its potential impact on long-term inflation expectations, we expect the ECB to announce a number of additional easing measures at its 10 March meeting. We are less confident in predicting the precise form that further monetary easing will take. However, as the date of the meeting has approached (and as global economic and financial market sentiment has deteriorated) the rhetoric of ECB Council members has turned increasingly dovish. In response, we have adjusted our ECB forecast and have increased the number and degree of measures that we think likely. In our central case, we now expect the ECB to announce the following actions: (1) a 10bp cut in the deposit rate, from -0.3% to -0.4%; (2) the introduction of a tiered deposit system, opening the possibility of further deposit rate cuts in the future; (3) a €10bn increase in the pace of monthly purchases under the Asset Purchase Programme (APP), from €60bn to €70bn per month; and (4) a six-month extension in the duration of the APP, from March 2017 to September 2017.

    Deutsche Bank

    DB thinks we’ll see a two-tier system producing a cumulative fall in the Eonia rate of about 10bps. Note that this implies a much larger cut on the rate attached to the lowest tier. Secondly new TLTRO auctions until the end of 2017 is expected. To further incentivise lending the ECB could decide to introduce a dedicated negative refi rate only for the TLTROs but there remains the risk that the Governing Council sees a negative refi rate as an unwarranted relief for banks. Thirdly, the Governing Council could compromise by agreeing upon a temporary EUR 10bn acceleration in the pace of its monthly QE purchases.


    We are expecting similar to consensus expectations for the ECB to deliver a further 0.10 percentage point reduction in the deposit rate, a further six month extension of the duration of the QE programme to the end of September of next year, and unlike in December to increase the amount of monthly QE purchases by EUR10 billion. If delivered the steps should contribute to a modest weakening of the euro. We doubt that the ECB will be able to weaken the euro more significantly. With financial market conditions improving recently, they are more conducive for euro weakness as further ECB easing further boosts the relative appeal of overseas assets for euro-zone residents.


    We continue to expect the ECB to ease policy again against a backdrop of downward revisions to the staff projections, a continued deterioration in inflation expectations and increased downside risks. We expect the Governing Council to deliver the following “package” of measures: lower the deposit rate by at least 10bp, increase the APP by €10bn per month to €70bn per month, extend the APP by a further 3 months to at least the end of June 2017, remove the deposit rate threshold for QE purchases, announce at least 2 new TLTROs beyond the last scheduled operation in June 2016 (possibly with more favourable conditions), dovish communication: forward guidance on rates (i.e., present or lower levels for an extended period of time) and a discussion and expression of willingness to cushion the impact of lower negative rates on banks in future, if necessary. In addition to the tangible action from the ECB, the communication on the potential for further action will be important in order to reduce the chances of repeating December’s “disappointment”. We expect the inflation projections to be revised down and support the need for additional stimulus. We look for a significant downward revision to just 0.1% in 2016 (from 1.0%) and to 1.4% in 2017 (from 1.6%), largely reflecting the impact of lower commodity prices and weaker core inflation. We expect the new projection for 2018 to be 1.7%. We look for the euro area GDP growth projection to be revised down to 1.4% in 2016 (from 1.7%) and to 1.8% in 2017 (from 1.9%), reflecting weaker global growth prospects, as well as the impact of weaker GDP growth around the turn of the year (with some offset from lower oil prices). We expect the new projection for 2018 to be 1.8%.


    We think it is now beyond any reasonable doubt that the ECB will announce a cut in the deposit rate at the policy meeting. Our forecast is for a 10bp cut to -40bp (to be followed by another 10bp cut in the June meeting). Although we do believe that a larger cut is possible – also taking into account the already elevated expectations in the market on this front – we do see a risk of Mr. Draghi receiving the same treatment as BoJ Governor Kuroda when he announced a cut into negative territory. We also expect the ECB to cut its 2016 inflation projection by at least half a percentage point from 1% in the Dec. projections (possibly with the forecast range signaling deflation risk). The 2017 estimate could also be revised lower from the previous 1.6%. However, the new 2018 estimate is key to gauging whether the ECB thinks that a return to its mandated inflation target is still possible over this horizon. Since the ECB won’t give up, we expect this to be close to the ECB’s target of “close to but below 2%.” Moreover, these measures do not really address the problem of sliding inflation expectations. Therefore, we think the ECB will also have to announce an expansion or extention of its PSPP programme. We expect an additional amount of EUR10-20bn in monthly purchases.


    Special focus will be on the latest ECB staff projections, not the only one but clearly one of the most important elements for the ECB to decide on further action. The weaker external environment and the drop in confidence indicators since December have made a downward revision of both the growth and inflation projections very likely. In our view, the key forecast for ECB policy-making will be the inflation forecast. With faltering growth momentum, another downward revision of the inflation outlook, and echoes of Mario Draghi’s comments at the January meeting, the ECB will likely have no option other than to announce more monetary stimulus. We think Draghi will deliver a mix of several small, but above-consensus, steps: a 20bp deposit rate cut, either two-tiered or with some other compensating measures for the banks, a broadening of QE scope and a 5bn euro increase in monthly QE purchases. On top of all, some verbal intervention suggesting that the ECB would tolerate overshooting of the inflation rate would also help to prop up inflationary expectations.


    As for the ECB, out European Economics team are looking for a 20bp cut in the deposit rate and a TLTRO extension. These are seen as more likely than an extension of the range of assets they buy. A ‘bigger than expected’ rate cut in the face of a market which really isn’t sure what to expect, coming after a US employment report that was solid even if the wage data give the fed no reason to act in March, may well be negative for the Euro.


    We continue to see the ECB delivering more easing than the market expects this month, even if composition it ultimately takes could be more complicated than usual given the array of policy options and operational changes which are possible. We look for a 20bps rate cut, a €10-15bn increase in the pace of monthly QE for at least the next six months, and some further injections of liquidity. But we would caution that there are still risks of disappointment, given activity data hasn’t universally been bad, given the debates on what policy tools can and should be used, and given the uncertain market reactions to changes such as tiered interest rates and the deposit rate floor. There is also scope for odd feedback loops between their decisions on rate cuts and QE with choices on a tiered interest rate structure and the deposit rate floor on asset purchases which could lead to exaggerated or counterintuitive market moves. Ultimately the ECB is likely to have to compromise something of their previous convictions to make policy more effective this month.

    Danske Bank

    The main event this week is the ECB meeting on Thursday with the rate decision at 13:45 CET and the press conference starting at 14:30 CET. We expect the ECB to cut the deposit rate by 10bp to -0.4%, to introduce a two-tier deposit rate system aimed at reducing the cost to the banking sector and signalling the deposit rate can go even lower. We also look for the ECB to front-load the QE purchases by EUR20bn p/m in spring to signal a willingness to support inflation.


    Today we have the ECB monetary policy meeting, where at 12:45 expectations are for the ECB to announce a further 10bp cut to the deposit rate and an expansion to its QE program. At 13:30 ECB President Mario Draghi will give is usual press conference and give more detail on any additional measures the ECB is undertaking. We could also see a larger deposit cut and some further expansion of the TLTRO program.

    Click here to read more about the ECB Interest Rate Decision from our in house Chief Analyst Valeria Bednarik titled “Draghi: to disappoint or not to disappoint”

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