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After today’s Board meeting, the European Central Bank (ECB) announced a package of easing measures: rate cut, asset purchases, tiering system and easier conditions for the TLTRO program. According to analysts at Wells Fargo, the announcement was more dovish than what they had expected, and now see another 10 bps deposit rate cut in December.
Key Quotes:
“With few expecting the ECB to raise rates anytime soon, it seems that these new asset purchases could continue for quite some time.”
“Consistent with the idea that easier ECB policy will be here for a while, the ECB cut its 2020 inflation forecast substantially to 1.0% from 1.4% and also trimmed the 2021 inflation forecast to 1.5%. In addition, ECB President Draghi noted a “persistence of downside risks” at today’s press conference, while also lowering its GDP forecasts for this year and next.”
“The central bank is concerned about the current weakness in the Eurozone economy, and has pledged to ease policy for as long as is needed to lean against that economic weakness. Against this backdrop, we are changing our forecast to include another 10 bps deposit rate cut in December.”
“The other measures—tiering and changes to the terms of the TLTRO—appear to be aimed at supporting the Eurozone banking system. The tiering system will exempt a portion of commercial banks’ excess liquidity from the negative deposit rate, effectively limiting the direct cost of negative interest rates on commercial banks. Importantly, the tiering system arguably offers more scope for further ECB rate cuts, as it could limit the potential side effects, including the impact on bank profitability, of moving rates further into negative territory.”
Key Quotes:
“With few expecting the ECB to raise rates anytime soon, it seems that these new asset purchases could continue for quite some time.”
“Consistent with the idea that easier ECB policy will be here for a while, the ECB cut its 2020 inflation forecast substantially to 1.0% from 1.4% and also trimmed the 2021 inflation forecast to 1.5%. In addition, ECB President Draghi noted a “persistence of downside risks” at today’s press conference, while also lowering its GDP forecasts for this year and next.”
“The central bank is concerned about the current weakness in the Eurozone economy, and has pledged to ease policy for as long as is needed to lean against that economic weakness. Against this backdrop, we are changing our forecast to include another 10 bps deposit rate cut in December.”
“The other measures—tiering and changes to the terms of the TLTRO—appear to be aimed at supporting the Eurozone banking system. The tiering system will exempt a portion of commercial banks’ excess liquidity from the negative deposit rate, effectively limiting the direct cost of negative interest rates on commercial banks. Importantly, the tiering system arguably offers more scope for further ECB rate cuts, as it could limit the potential side effects, including the impact on bank profitability, of moving rates further into negative territory.”
