ECB Beats Expectations; Focus Is On Credit Easing Rather Than Negative Rates

Today the European Central Bank (ECB) engaged in further expansion of its monetary policy, due to downside risks to Eurozone growth given weaker global conditions.

While at initial glance it appeared that ECB President Draghi had ‘thrown the kitchen sink’ at the lack of growth/inflation with the expanded QE purchases (including the surprise non-bank IG corporates) and Long Term Refinancing Operation (LTRO) program, a press conference which raised the bar on future interest rate cuts and maintained constraints on LTRO usage took the shine off the easing package.

ECB’s package:  10bps Deposit Rate Cut, Expansion in QE purchases from EUR60bn to EUR80bn, Non-Bank IG Corporate Bond Purchases and new LTRO program

  • Focus on credit easing (expanding QE purchases by EUR20bn a month to EUR80bn, including non-bank IG corporates) rather than interest rates (just a 10bps deposit rate cut).
  • Focus on expanding credit flows (through unconventional measures such as LTROs at negative deposit rates) rather than further EUR depreciation.
  • Raising the bar on rate cuts for the foreseeable future; although Draghi didn’t formally close the door on rate cuts as the term ‘rates at present levels or lower’ still appears in the forward guidance. Why raise the bar for future deposit rate cuts? As without a tiered deposit rate for banks (which Draghi says would be very complex), any further cuts in the deposit  rate will hurt banks profitability.

ECB’s New Growth and Inflation Forecasts

The ECB’s new set of growth and inflation forecasts were also released today, with decent downgrades to both growth and inflation (although largely in line with expectations). In our view, the 2018 HICP forecast of 1.6% is particularly notable given its distance from the 2% inflation target.

The comments provided herein are a general market overview and do not constitute investment advice, are not predictive of any future market performance, are not provided as a sales or advertising communication, and do not represent an offer to sell or a solicitation of an offer to buy any security.  Similarly, this information is not intended to provide specific advice, recommendations or projected returns of any particular product of Standish Mellon Asset Management Company LLC (Standish).  These views are current as of the date of this communication and are subject to rapid change as economic and market conditions dictate. Though these views may be informed by information from publicly available sources that we believe to be accurate, we can make no representation as to the accuracy of such sources nor the completeness of such information.  Please contact Standish for current information about our views of the economy and the markets.  Portfolio composition is subject to change, and past performance is no indication of future performance.
BNY Mellon is one of the world’s leading asset management organizations, encompassing BNY Mellon’s affiliated investment management firms, wealth management services and global distribution companies. BNY Mellon is the corporate brand for The Bank of New York Mellon Corporation. Standish is a registered investment adviser and BNY Mellon subsidiary.

Share This Page