ECB: With one foot on the brake and not full throttle – Rabobank

FXStreet (Delhi) – Elwin de Groot, Senior Eurozone Strategist at Rabobank, notes that on the basis of a “thorough assessment of the strength and persistence of the factors that are currently slowing the return of inflation”, the ECB announced five fresh measures to address this.

Key Quotes

“Firstly, it cut the deposit rate by 10bp to -0.3%, whilst holding all other rates unchanged. Secondly, it announced a 6 month extension (until the end of March 2017) of the asset purchase program (APP), a decision to reinvest the principal payments on the securities purchased under the APP as they mature, an inclusion of regional and local government debt in the APP and an extension of the full allotment procedure until the end of 2017.

As expected, the GDP growth projections were kept largely unchanged, whilst the projections for inflation were revised down slightly – in line with the recent development in oil prices.

Given that the ECB probably had a fairly good idea of what had been priced in (certainly on the deposit rate, where the market was positioned for a 15bp cut), we must assume that today’s decision was taken with the full knowledge of the fact that the markets would be disappointed. And they were. Government bond markets sold off with Bund yields jumping almost 20bp, whilst the euro jumped more than 3 big figures vis-à-vis the dollar, reaching above 1.09 in the aftermath of the ECB press conference.

In the Q&A session, Mr. Draghi conceded that the decision was not unanimous but that a “large majority” had been in favour of the easing package. We would argue it was probably the ‘maximum achievable package’ that garnered sufficient support. We draw this conclusion from the fact that the ECB did not even decide to announce a ‘market neutral’ cut in the deposit rate of 15bp (as had been our call), which would have been an easy option to limit any market impact.

Hence, our take of this meeting is that the hawks in the Governing Council have prevented the doves this time to execute a bolder plan. Our impression is that the decisions to extend the full allotment period and to reinvest the maturing principals were added to make it a “five point plan”, but both carry relatively little weight in the sense that there were probably very few investors out there that did not expect this to happen somewhere along the way in any case.”

Elwin de Groot, Senior Eurozone Strategist at Rabobank, notes that on the basis of a “thorough assessment of the strength and persistence of the factors that are currently slowing the return of inflation”, the ECB announced five fresh measures to address this.

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