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ECB to act again in March: Depo rate cut of at least 10bp & altered QE pace - Nomura

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

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    FXStreet (Delhi) – Research Team at Nomura, notes that the ECB delivered a dovish message with an upfront return of forward guidance on interest rates to highlight that the Governing Council expects interest rates to remain at present “or lower” levels for an extended period of time.

    Key Quotes

    “Against a backdrop of increased downside risks (amid heightened global uncertainty), unwanted tightening of financial conditions, weaker-than-expected inflation dynamics and significant deterioration in the inflation outlook/expectations, the Governing Council noted it will be “necessary to review and possibly reconsider our monetary policy stance at our next meeting in early March” (unanimously agreed).

    Furthermore, inflation rates are currently expected to remain at very low or negative levels in the coming months due to the sharp decline in oil prices (-40% since the December projections). According to our latest profile, inflation will turn negative again in February until August, while the ECB is shaping up to have to revise its 2016 inflation forecast down to around 0.0% from 1.0% in December.

    We now expect the ECB to ease again on 10 March, via a further cut in the deposit rate of at least 10bp to -0.4% (and potentially by more depending on FX market conditions and sequencing of other central banks in the run-up to the next meeting).

    In view of the Governing Council’s “power, determination and willingness to act” and unwillingness to extend the policy horizon over which inflation returns back towards 2%, we do not expect the duration of the APP to be extended in March beyond the current March 2017 guidance. However, we expect an increase in the monthly pace of purchases (either additional purchases or via frontloading) that would help to further underpin inflation expectations in conjunction with a deposit rate cut.

    In terms of the composition of the ECB’s next easing package we still think a combination of deposit rate cut in conjunction with QE alterations is most likely. With respect to rate cuts, the market is discounting now a full 10bp deposit rate cut for March.”
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