Relaxing the ECB’s constraints: Return of 20 options - TDS

Renuka Fernandez, Senior Rates Strategist at TDS, suggests that they find that the ECB has enough eligible assets as of right now to run to the end of the asset purchase program in March 2017, without hitting limits on German debt.

Key Quotes

“On either a 10bps or 20bps cut to the deposit rate, and a €10bn step up in monthly purchases, we find that the ECB will still have enough assets to run till the end of the purchase program. Consequently we do not expect them to change the technical parameters around their program in March. 

However, given expectations of several months of negative inflation and falling inflation expectations, we would expect ECB QE to ultimately have to run for longer than originally planned. This will become more apparent later on in the year, consequently we would expect them to address the program constraints at that point. In particular, we would expect them to move away from the capital key weighting to total market capitalisation if QE needed to be adjusted further. 

We consider again what a tiered deposit rate system could look like in the Euro Zone, and whilst we don’t expect them to cut the depo rate in a ‘2-tiered way’ at this meeting, we think it increasingly likely that they introduce such a system in the event that they need to cut rates further going further.”