ECB: Members Expressed Concerns About Further Cut in the Deposit Rate - Rabobank
ECB: Members Expressed Concerns About Further Cut in the Deposit Rate - Rabobank
Stefan Koopman, Market Economist at Rabobank, suggests that there was a
broad agreement among the members of the Governing Council that the
inflation and growth outlook had deteriorated since the meeting in
December.
Key Quotes
“This was also
backed by a sharp cut in the staff forecasts and a large drop in
market-based inflation expectations. There was a broad consensus among
the GC that monetary policy needed to respond to this setback.
The
TLTRO-IIs appeared to have the most backing, followed by the decision
to add another EUR 20bn to its monthly APP purchases. To facilitate
this, non-bank investment grade corporate bonds had to be added to the
ECB's grocery list and some of the APP’s parameters (e.g. the ECB’s
share of the purchases) had to be adjusted, but at this stage they were
getting into disputed territory. There was, for instance, no mention of
the capital key or the deposit rate hurdle.
Even though the
Governing Council seems to have ransacked its toolbox at its meeting in
March, it's still not completely empty. First of all, the accounts made
it explicitly clear that the GC would not rule out further cuts in
policy rates if new shocks to the inflation outlook were to materialise.
The 10 bps cut in the deposit rate to -0.40% is therefore by no means
the final cut. However, some of the members expressed concerns that a
further cut in the deposit rate could have possible adverse side
effects, in terms of banks' profitability and, hence, the banking
system's stability. This, in turn, signals that the ECB thinks there
actually is a lower bound to negative interest rate policy.
Secondly,
in order to be able to fully source the bonds needed to get to the EUR
80bn/m purchase target, the ECB might still decide "to propose new
parameter changes as needed". It's not entirely clear what these
parameters precisely encompass, but note that there is still some
"wiggle room" regarding the capital key restrictions, the issue share
limits or the deposit rate purchase floor. Even though there are
numerous technical, and most certainly political, issues that would
arise when such changes are implemented, we can't rule them out. Draghi
has proven over and over again that he's able to find a way round to
this.”
(Market News Provided by FXstreet)
