Central Banks: BoJ’s action reinforces market expectations of ECB depo rate cut

The BoJ’s decision to move into negative territory for the first time in its history has reinforced market expectations of depo rate cuts by the ECB in 2016. In particular, a 10bp depo rate cut at the March meeting is currently fully priced in, and the market expects a cumulative cut of at least 20bp by the end of the year.

Last Friday, the Bank of Japan introduced its “quantitative and qualitative monetary easing with a negative interest rate”. More specifically, starting from the February reserve period (beginning on 16 February), the BoJ will apply an interest rate of -0.1% to current accounts held financial institutions at the central bank. 
Having stabilised following a sharp increase a fter President Draghi’s comments at the January meeting, expectations of a depo rate cut have risen again on this BoJ’s move. Currently, the ECB dated Eonia forward curve fully prices in a 10bp depo rate cut in March and at least another 10bp later this year, for a cumulative cut of at least 20bp. "However, we believe the pricing of the Eonia fixing for the D ecember reserve period at about -45bp is consistent with market expectations of about an 80% likelihood of a depo rate at -55bp by the end of the year", Barclays says. The reinforcement of rate cut expectations has favoured a further rally at the front end, with more inversion of the curve. The 1y1y Eonia forward has moved through -40bp. "At this level some profit taking is likely in our view", the broker declares.

Another factor that could rise pressure for ECB depo rate cut arrives from macro level. According to preliminary data, euro area inflation rose to +0.4% in January from +0.2% in December. "However – Barclays says – we expect it to fall slightly below zero from February and to increase at a gradual pace in H2 – given that a large part of the positive base effect stemming from energy should be removed in February and resume only in July/ August".