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.
“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.”