Research Team at Rabobank, notes that the ECB cut its deposit rate by 10bp to -0.40% and its main refinancing rate by 5bp to 0.00%; announced a new series of four targeted long-term refinancing operations (TLTRO 2); and expanded its QE program by EUR20bn to EUR80bn a month, with investment grade euro-denominated bonds issued by non-bank corporations now being included in the list of eligible asset for purchase.
Key Quotes
“The extent and comprehensiveness of this package exceeded our expectations, even though it did contain all the three elements that we had foreseen: a deposit rate cut, new TLTROs and an expanded QE.
The majority of these measures was already included in the press release ahead of the press conference – clearly in an attempt to maximize market impact. This strategy appeared to work as the market’s initial reaction to the plethora of measures was decidedly positive when looking at riskier asset classes, such as equities and corporate bonds. However, most of that positive impact faded on the back of President Draghi’s comments, and this continued in the hours after Draghi delivered his press conference.
Sovereign spreads tightened initially, and the yield on German 10y Bunds fell almost 6bps. However, in line with the U-turn in risky assets, yields reversed their course and rose to levels 5bp higher than before the rate announcement. The 1y Eonia swap rose more than 6bp as expectations of further aggressive deposit rate cuts were priced out. The Eurodollar initially slumped to 1.0850 (from just below 1.10 before the announcement) but then pushed its way back to levels just shy of 1.12. In other words, a manic reaction of a market in search of an anchor.
In the ECB staff projections, the GDP growth rate for 2016 was reduced to 1.4%, from 1.7% and the 2017 growth rate from 1.9% to 1.7%. The inflation forecast for 2016 was slashed from 1% to 0.1% on the back of lower oil prices, but also the 2017 forecast was reduced by 0.3%-points to 1.3%. The 2018 forecast (a new projection) was set at 1.6% – which could be interpreted as being at the low end of the ECB’s price stability definition of “below but close to 2%”.
We perceive this as a signal that the ECB is rethinking its strategy. The Governing Council is looking to shift away from cutting rates further, and instead would now rather try and put focus on measures that increase the effectiveness of low interest rates.
After the extensive easing implemented today, combined with Draghi’s commentary, we now see the ECB on hold in the coming months, and at least until June.
If the ECB sees the need for further action beyond June, we still see the option of a -10bp cut in the deposit rate. That said, Draghi’s remarks today lead us to believe that the Governing Council may be in the process of mixing up its strategy.”
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