ECB Policy Preview: Crunch time for ECB – March 2016

Image via ECB/ Flickr. ECB Council Meeting December 2015

The ECB meeting due this week on March 10th is likely to be the big event overshadowing other market events over the week. As pressure builds for the ECB to act, in light of recent flash Eurozone CPI estimates pointing to continuing concerns of weak inflationary pressures, the onus is now on the ECB which at its January meeting stated that policy actions could be decided at its March meeting. The big question is not whether the ECB will take policy measures to fight inflation but the scope of the measures and if they will have any consequences in terms of lifting inflation. It is very likely that the ECB’s inflation forecasts will be revised lower again including the GDP numbers.

The ECB’s meeting comes at a time when monetary policy measures, especially the unconventional parts such as negative interest rates and QE are being questioned by the markets. In January the markets reacted to the BoJ’s surprise negative rate policy and to this day, the Yen has had little to no impact after the negative rates were introduced. It is possible that the ECB has learned its lessons from other Central Banks as was communicated over the past weeks that the ECB was looking at policy measures implemented by other Central Banks.

On Friday, it was reported that there was no consensus yet among the ECB’s governing council on the measures the Bank is expected to take. The news report sent the Euro surging ahead of the NFP noise highlighting the uncertainty in the markets over what the ECB could do.

Broadly, the ECB’s tactics heading into March’s policy meeting has been to stay mum. Benoit Coeure was among a handful of ECB officials who solely blamed the markets for expecting too much in the December meeting, which saw the Euro close the day with sharp gains of over 3.0%. Clearly, the ECB has managed to avoid the same trap this time around.

ECB Policy Expectations

Heading into the ECB’s meeting this week the potential policy changes are likely to be:

• Deposit rate cut: It currently stands at -0.30% following a rate cut of 10bps in December 2015. Expectations are for a further rate cut of 10bps – 20bps which could bring the interest rates on deposit facility down to -0.40% or -0.50%.
• Expansion to QE purchases: While the ECB stopped short of expanding the QE purchases which currently stands at €60 billion Euro, in this week’s meeting, the ECB could look at expanding the QE by another €10bn – €20bn, bringing the QE purchases to around €70 – €80bn per month, almost a year after introducing the QE in January 2015
• Extension to QE purchases: While in December Draghi signaled an extension of the Q by six months to March 2017, this is likely to be extended into June of 2017
• Removal of deposit rate floor: So far the ECB’s QE purchases have involved buying sovereign bonds that only yield above the ECB’s deposit rate. This barrier could be removed in order to meet the growing QE purchases which would lead the ECB to buying bonds yielding lower than the deposit rates

ECB Policy Forecasts

Here is a brief summary of some forecasts/expectations made from some of the big banks.

Bank	Forecasts on deposit rates	QE Purchases	Other
Goldman Sachs	10bps cut	+€10 billion	Introduction of tiered rate system
JP Morgan	20bps cut	+€10 billion	QE extended to June 2017 with two additional TLTRO’s
BNP Paribas	20bps cut	+€10 billion	QE extended to September 2017
Citi	10bps cut	+€15 billion
BofA Merrill Lynch	10bps cut	+€10 billion	QE extended to September 2017 with TLTRO expansion
ABN Amro	20bps cut	+€10 billion	QE extended to June 2017, removal of deposit rate floor and tiered deposit rate system
Credit Suisse	10 – 20 bps cut	Up to €20 billion	Additional TLTRO
RBC	10bps cut	No Change	Additional TLTRO
HSBC	10bps cut	No Change	Removal of deposit rate floor
Morgan Stanley	10bps cut	+€20 billion	–

*Source: Bloomberg

ECB Policy – Contrarian view

While most of the mainstream analysts are looking at policy measures at the ECB’s meeting this week, Zerohedge reports that no matter how the ECB plays its cards, it would signal the fact that policy makers are at nearing the end game reminding readers on the outcome of the December 2015 meeting. Citing a hedge fund, Zerohedge notes that the potential for another ECB disappointment could be in the making considering how the markets reacted to the BoJ’s negative rates in January.

“Market discounting ECB to intervene boldly, via a combination of increased QE, LTRO, depo rate cut, without collateral damage caused on banks by deeply negative interest rates.”

On the other end of the spectrum, Yohay Elam from Forexcrunch.com notes that the ECB could be preparing the markets for a ‘shock and awe’ reminding how a leaked report from the ECB just days ahead of January 2015 meeting set the benchmark followed by over delivering at the meeting itself.

“Therefore, we can assess that the ECB night be attempting to repeat the successful move seen 14 months ago and avoid the bitter one seen 3 months ago: a move to lower expectations, under promise and then over-deliver”

Whether the ECB will come out strongly or will merely meet market expectations is anyone’s guess but the uncertainty fact is likely to play a big role in how the Euro will react come March 10^th.