Nick Kounis, head financial markets research at ABN AMRO, suggests that they are expecting the ECB to further push out its forward guidance on the period of unchanged policy rates and ongoing reinvestments.
Key Quotes
“The modest trajectory for economic growth will not be sufficient for underlying inflationary pressures to build. We think that ECB forecasts for growth and inflation remain too high despite recent downgrades. Our base case is that ECB policy interest rates will remain on hold through to the end of 2020 and that reinvestments will continue to the end of 2021.”
“Second, we think that the ECB will announce relatively easy terms on the new TLTRO-III in June. The pricing will probably be similar to TLTRO-II so banks can borrow at rates as low as the deposit rate if they meet certain lending benchmarks.”
“Beyond these steps, there is a rising chance the ECB will need to do more. There has been speculation that a tiered deposit rate system could open the door for further cuts in the deposit rate.”
“We are not convinced by that at this stage. We think the ECB is looking into this issue now because it expects the current level of negative rates to last for much longer, rather than because it is looking to cut rates further. If rate cuts are off the table, then the ECB may revive what has been its main stimulus tool of choice over the last few years: QE. Indeed, we think the probability of QE-II has risen significantly, though it is not yet our base case.”
“To do this the ECB would need to raise its issue(r) limit from the current 33% on sovereign bonds. It was introduced so that the ECB would not have a deciding vote in case of a debt restructuring due to collective action clauses. However, the ECB has shown some flexibility on issue(r) limits in the past. For instance, the issue(r) limit on supranational bonds was raised to 50%. Although raising the limit would likely be an uncomfortable situation for the ECB, it would be willing to do this in our view given the lack of other alternatives.”
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