The European Central Bank, as expected, kept monetary policy unchanged after today’s meeting and changed its growth risk assessment to the downside. According to analysts at Danske Bank, continue to see (probability of 75-80% another liquidity round announcement in March, to be implemented in June.
Key Quotes:
“In line with our non-consensus call, ECB changed the growth risk assessment – unanimously – to the downside in light of continued weaker incoming data and persistent global uncertainties. This has been long overdue in our view and with January PMIs released earlier today just showing another strong dip, a balanced risk assessment would clearly have challenged the ECB’s claim of being data-dependent.”
“The ECB’s decision was clear in both its date and state dependent aspect of the forward guidance. Markets are currently pricing the first rate hike by 20bp in 22 months (October 2021). Draghi stressed that when markets price a first rate hike in 2020 they are correct as they use the state dependent part of the forward guidance.”
“Given the state dependent emphasis by Draghi, it is also important to stress that it also implies that if the economy picks up (as implied by the December staff projections), markets will have to reassess the pricing as rate hike is on the table. We therefore keep our ECB rate call for December by 20bp. We find the ECB pricing too dovish.“
“We do not think a new liquidity operation is as clear cut as market participants suggest (some 90% expect liquidity operation in March). That said, with the NFSR approaching and a fragile banking sector in parts of the euro area, we stick to our call for a March announcement of LTRO, but with less probability than prior to the meeting. We assign a 75-80% probability of liquidity operation announcement in March.”
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