Research Team at Nomura, suggests that in an environment of increased downside risks, weaker staff projections (for both growth and inflation), weakening inflation expectations and increasing market concerns over the ECB’s ability to meet its mandate, the ECB is set to ease policy further.
Key Quotes
“ECB to deliver yet another “package” via Depo/APP/TLTROs: We expect easing to again feature action both on the deposit rate (a cut of at least -10bp) as well as the APP (an increased pace to €70bn per month). Given that the ECB is likely to want to be seen as delivering another “package” of measures (on top of those in December), we also expect additional TLTROs beyond the last one scheduled for June 2016 to be announced on 10 March (similar to the existing TLTROs or possibly with eased conditionality). The risk to our expectation is tilted towards more rather than less easing.
Tiered deposit rate: The ECB needs to strike a balance between a negative deposit rate strengthening the ECB accommodation, but also cushioning some of the impact on the banking sector. From this perspective, a tiered excess reserve remuneration system moves into the spotlight. While we are unconvinced that a done and dusted plan for a tiered deposit rate system will be presented at the March meeting (the likelihood increases with a deposit rate cut of more than 10bp), the ECB should provide hints in that direction and intensifying the discussion. This would already send the right signal for the prospects of further rate cuts if needed.
Strategy: Even though market expectations for the March meeting go a bit beyond our 10bp deposit rate cut baseline, the communication should be in the spotlight. From this perspective the prospects of tiered deposit rate as well as flexibility on QE design elements (capital key, deposit rate threshold for QE purchases) going forward will be crucial to avoid market disappointment.”
(Market News Provided by FXstreet)