Research Team at Nomura, continues to expect the ECB to ease policy again on 10 March against a backdrop of downward revisions to the staff projections, a continued deterioration in inflation expectations and increased downside risks.
Key Quotes
“Taking into account the latest information on further deterioration in the inflation outlook (5y5y reaching new low below 1.4% and weak February HICP inflation of -0.2% y-o-y and core 0.7% y-o-y), we expect the Governing Council to deliver the following “package” of measures:
• lower the deposit rate by at least 10bp
• increase the APP by €10bn per month to €70bn per month
• extend the APP by a further 3 months to at least the end of June 2017
• remove the deposit rate threshold for QE purchases
• announce at least 2 new TLTROs beyond the last scheduled operation in June 2016 (possibly with more favourable conditions)
• dovish communication: forward guidance on rates (i.e., present or lower levels for an extended period of time) and a discussion and expression of willingness to cushion the impact of lower negative rates on banks in future, if necessary.
In addition to the tangible action from the ECB, the communication on the potential for further action will be important in order to reduce the chances of repeating December’s “disappointment”.
While forward guidance and openness to excess reserve remuneration changes/deposit rate tiering would send the right signals for prospects of further rate cuts and underpin policy momentum, we cannot now rule out the Governing Council making a concrete decision as early as 10 March on changes to excess reserve remuneration.
In the context of keeping the door open to lower rates, we believe the removal of the deposit rate threshold for purchases will help alleviate scarcity concerns over implementing a larger APP over time in an environment where further deposit rate cuts are priced.
Staff projections: on our estimates, the oil price technical assumption will be around 30-35% lower in euro terms for 2016-17 and the euro TWI about 5% higher compared with three months ago. These two factors alone are likely to exert significant downward pressure on the inflation projections.
We expect the inflation projections to be revised down and support the need for additional stimulus. We look for a significant downward revision to just 0.1% in 2016 (from 1.0%) and to 1.4% in 2017 (from 1.6%), largely reflecting the impact of lower commodity prices and weaker core inflation. We expect the new projection for 2018 to be 1.7%.
We look for the euro area GDP growth projection to be revised down to 1.4% in 2016 (from 1.7%) and to 1.8% in 2017 (from 1.9%), reflecting weaker global growth prospects, as well as the impact of weaker GDP growth around the turn of the year (with some offset from lower oil prices). We expect the new projection for 2018 to be 1.8%.”
(Market News Provided by FXstreet)