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.

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