Waiting for ECB: more easing in March

9 years ago - Published in Finance, Fundamental Analysis

Investors are waiting for the next ECB's meeting in march, with the European Central Bank could once again pump up its stimulus program. In a research report, Barclays expects the ECB to fight a worse-than-expected inflation outlook with additional monetary easing: a 10bp depo rate cut in March followed by another later in the year, possibly as early as June, which would bring the depo rate to -50bp. 

Barclays strategists expect also some changes to the composition of the QE programme in March, which may include semi-public debt. There is no formal (rules-based) definition of ‘semi-public’, but taking entities that are majority (50% or more) owned by euro area governments, analyst estimate that at least €100bn of assets could be added to the pool of potential PSPP purchases. The ECB may also consider the removal of the deposit rate floor on PSPP purchases, which should support EGB front-end valuations. 

Since the December ECB meeting, when the Governing Council (GC) voted to boost monetary stimulus as the ECB staff revised down its inflation forecasts, global risks have increased, financial volatility has risen and, most importantly, the euro area inflation outlook has deteriorated further. These risks were highlighted in a dovish January ECB meeting. Against this backdrop, the 5y5yf inflation swap rate has fallen further, close to its historical lows and our (downward) revised HICP inflation targets for 2016 and 2017 of 0.1% and 1.3%, respectively. 

“Even if we believed that further depo rate cuts were an option (ie. below -50bp), we expect see limited space for such moves – explain Barclays strategists – Deeply negative rates in a context of rising liquidity surplus can severely hurt banks’ profitability, thus raising the risk of an increase in bank lending rates. Not only do banks have to deal with low yields and compressed margins that affect their earnings on bond portfolios and lending activity, but further, in some euro area countries, their ability to pass on the cost of ECB deposits to final clients is limited by national legislation that does not allow banks to charge negative rates on retail deposits”. The recent BoJ decision to use a tiered system could present an interesting ‘‘reference case’’ for the ECB for the future. 

Source: Barclays (Cross-Asset Research)