ECB Review: Few Surprises – RBS
Research Team at RBS, notes that as expected the ECB left all its key policy settings unchanged but still left the door open to some further easing if needed.
“The Governing Council is clearly waiting to see how the measures that were enacted in March impact economic conditions. And since the CSPP and TLTROs have not yet even been implemented it would have been premature to expect easier monetary policy to emerge today.
The upward revision to the ECB’s growth projections for 2016 (to 1.6% from 1.4%) was not a surprise but the small downward revision to the longer-term outlook (for 2018) was telling. In the meantime the small upward revision to the ECB’s inflation projection for 2016 (to +0.2% from +0.1%) was more muted than we would have anticipated relative to the sharp appreciation in oil prices that has been unfolding.
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 by year-end (from the current pace of €80 billion) and for the deposit rate to be cut to -60bps (from -40bps). The risks to that view remain tilted toward more QE (encompassing its size, composition and duration) relative to rate cuts. At present we’re anticipating a next move in September though the risks to this are tilted toward a move in Q4 and not Q3.
RBS research is still bullish bunds. We remain bullish fixed income and expect that the ECB will continue to support the market as inflation fails to recover at the pace expected and the downside risks re-emerge in the global environment. We expect a strong TLTRO II uptake to support periphery spreads, although we cut risk in our recent Rates Weekly. We expect that the CSPP will also help by removing some downside risks, especially to BTPs, which are often used as a hedging tool in volatile credit markets.
Our currency views are unchanged post meeting and press conference. We still think the next meaningful move in EUR/USD might be higher to 1.17 which is a little bit counter consensus. Behind that is our view that Euro zone inflation expectations can fall further, pushing real front end Euro rates higher and supporting the currency. More broadly, we have a forecast range for EUR/USD over the next 12 months of 1.17-1.08. Trade weighted EUR could be rather noisier because of the relatively high weighting of sterling in the basket – but that’s a discussion more about the UK Referendum than about the ECB.”