ECB Preview: Easing Mix in Sight as Draghi Aims to Over-Deliver

High market expectations.
Photographer: Jasper Juinen/Bloomberg

The ECB is expected to deliver a package of easing measures at a March 10 meeting, or risk disappointing markets that are already pricing aggressive action.

Expected policy measures include a deposit-rate cut by at least 10 basis points, an increase of 10 billion to 20 billion euros in monthly asset purchases and an extension of the program, economists and strategists say in client notes and interviews. The ECB is also likely to announce downward revisions to CPI and GDP forecasts, which would probably lead to broader consensus among governing council members for more easing.

ECB-dated Eonia forwards price about a 12-basis-point cut to the deposit rate at the March meeting, assuming a spread similar to the current six basis points between Eonia fixings and the ECB deposit rate. Additional easing of about 11.5 basis points is priced for the September meeting.

How much will the ECB cut the deposit rate?

  • Goldman Sachs expects the ECB to cut the deposit rate by 10 basis points, though any more would probably meet resistance from several members who have concerns about the possible negative impact on the banking sector, according to economist Dirk Schumacher.
  • JPMorgan expects the ECB to deliver a deposit-rate cut of 20 basis points to -0.5 percent in March, and to bring it to -0.7 percent by June, economist Greg Fuzesi says.
  • BNP Paribas expects a 20-basis-point deposit-rate cut in March, accompanied by tiering, according to chief eurozone market economist Ken Wattret.
  • Citigroup expects the ECB to cut the deposit rate by 10 basis points to -40 basis points, and sees further cuts to follow at later meetings this year, senior economist Guillaume Menuet says.
  • Bank of America Merrill Lynch expects the ECB to cut the deposit rate by no more than 10 basis points, which is what’s currently priced in markets. The central bank is probably realizing a deposit-rate cut bigger than 10 basis points could be counterproductive, G-10 currency strategy head Athanasios Vamvakidis says. At the same time, it wants to deliver and avoid doing less than market expectations, Vamvakidis adds.
  • ABN Amro’s base case is for a 20-basis-point deposit-rate cut, followed by another 20 basis points in June, according to Nick Kounis, head of macro research.
  • Credit Suisse analysts including Peter Foley say a decrease of 10 basis points, possibly 20 basis points, seems very likely.
  • RBC Capital Markets expects a 10-basis-point deposit rate cut flanked by the introduction of a tiered deposit rate, economists including Cathal Kennedy say.
  • HSBC expects another 10-basis-point cut to the deposit rate, economists Fabio Balboni and Karen Ward say, adding that there are potentially negative side effects of further rate cuts on commercial bank profitability.
  • Morgan Stanley’s base-case scenario is for a 10-basis-point deposit rate cut, chief economist Elga Bartsch says.

Any QE adjustment expected? Any other measures?

  • Goldman Sachs sees an increase of 10 billion euros in the volume of monthly purchases to 70 billion euros, Schumacher says. The bank also expects an announcement of a tiered rate system for reserves, even as the new system will probably become effective only at a later stage, he adds.
  • JPMorgan sees a 10-billion-euro increase in the monthly pace of QE purchases to 70 billion euros, a three-month extension of QE to mid-2017 and two additional TLTROs during the second half of 2016, according to Fuzesi. The ECB will probably also announce another six-month extension of the QE program as early as June, taking it through to end of 2017, Fuzesi adds.
  • BNP Paribas expects the monthly run-rate of asset purchases to rise by 10 billion euros, accompanied by a further extension of the reference date to September 2017, Wattret says, adding that a longer-term liquidity provision to banks could also be announced.
  • Citigroup sees up to 15 billion euros of extra of public-sector purchases per month, Menuet says, adding some adjustments to liquidity operations are also likely.
  • The ECB will probably extend QE by six months and increase monthly purchases by 10 billion euros, and the latter will be an effort to surprise markets positively, Bank of America Merrill Lynch's Vamvakidis says. An expansion of TLTROs is also likely, to make them more attractive to banks, he adds.
  • ABN Amro expects a 10-billion-euro increase in monthly asset purchases and an extension of the program to June 2017, Kounis says. The deposit-rate floor will probably be removed for asset purchases, and a tiered deposit-rate system and even longer-duration refi loans are also likely, he adds.
  • Credit Suisse expects the ECB to extend the liquidity provision with additional LTRO-type measures, and increase monthly asset purchases by up to 20 billion euros, analysts including Foley say. The latter would be a strong policy decision, they add.
  • Economists at RBC Capital Markets including Cathal Kennedy see no change to the size and duration of the QE program at this month’s meeting. However, they expect the first indications that the composition might be changing further and see a good chance of an introduction of an extra-long term refinancing operation as a first step toward more credit easing.
  • The ECB will probably drop the yield floor for the asset-purchase program, while expanding issuer limits, according to HSBC economists Balboni and Ward. They don’t expect the ECB to increase monthly QE purchases, and see a substantial downward revision of CPI to 0.4 percent.
  • Morgan Stanley expects an additional 20 billion euros of asset purchases per month, economist Bartsch says.

Is there a bottom for Draghi? What's next?

  • Next question the ECB will face is how to address the scarcity of German sovereign bonds, though any decision on this not imminent, Goldman Sach's Schumacher says.
  • The ECB may send a clear signal that a tiered deposit-rate system will be considered later, JPMorgan's Fuzesi says.
  • Any increase in monthly purchases could be larger than 10 billion euros, but probably not by much, given scarcity issues, BNP Paribas' Wattret says. If not announced this month, the ECB will probably signal that tiering is on the way, he adds.
  • Expected measures of more monthly asset purchases and possible adjustments to liquidity operations probably won’t be enough to alleviate pressure on banks, Citigroup economist Menuet says. Later this year, the ECB is likely to deliver a further rate cut to -0.5 percent, shift to a tiered rate system and announce another extension of its asset-purchase program beyond the current March 2017 deadline, he adds.
  • Whether the ECB will need to ease even further in the future will depend more on global, rather than domestic developments, strategist Vamvakidis at Bank of America Merrill Lynch says.
  • There are limits to ECB policy, but they have not been reached yet, ABN Amro's Kounis says. QE could be boosted, and getting rid of the capital key or issuer limit would be the next steps after March in this case. Further policy rate cuts are also possible, Kounis adds.
  • The ECB will be keen to remind investors that it can buy pretty much everything, including bonds and equities, analysts at Credit Suisse including Foley say. The central bank will probably extend QE to at least more “quasi- government” corporates, and ideally to forms of synthetic investment-grade credit assets, they add.
  • Credit easing is the way forward, and a shift in the QE program composition is possible and could involve moving away from capital key and including corporate securities, economists at RBC Capital Markets including Cathal Kennedy say. However, perceptions of moral hazard and market distortions may make such an option unpalatable at this stage, they add.
  • Economists Balboni and Ward at HSBC see further negative interest rates as the “direction of travel” in coming meetings, given more limited political resistance.
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