ECB Policy Review - RBS
Research Team at RBS, suggests that for the ECB, easing skies are still clear even if the helicopters can’t fly.
Key Quotes
“As expected the ECB left all its key policy settings unchanged yesterday and left the door open to some further easing if needed.
There remains a clear concern that with inflation expectations stuck
near record lows a more acute deflationary mind-set could soon set in.
Indeed it was notable that Draghi suggested that headline CPI inflation
could turn negative again in the coming months (in line with our
forecast too).
We still look for the ECB to ease policy again in the coming months
and specifically expect the monthly QE programme to be lifted to €125
billion per .month. by year-end (from the current pace of €80 billion
per .month.) and for the deposit rate to be cut to -60bps (from -40bps).
The risks to that view are tilted toward more QE (encompassing its
size, composition and duration) relative to rate cuts but tilted
nevertheless toward an overall policy that is more dovish not less.
Three
points emerge from a fixed income strategy perspective: most noteworthy
(1) The CSPP takes a very broad view of the non-bank market. We
estimate a €700bn universe. (2) No new details on TLTRO II. (3) The ECB
will not support a Europe specific initiative on sovereign risk weights.
From
an FX vantage point, the ECB’s policy focus remains tilted toward
credit creation rather than deposit rate cuts (and a weaker euro). Additional easing will be needed before the multi quarter decline in EUR/USD resumes.”
