According to analysts at Westpac, the June ECB meeting marked a continued dovish shift with the ECB now “ready to act” in the case that “adverse contingencies” materialise.
Key Quotes
“Ultimately, this is an acknowledgement that high economic uncertainty is going to linger for some time and downside risk has increased.”
“So what are these adverse contingencies? The dominant worry relates to the persistent weakness in the manufacturing sector which is more exposed to external demand. While he notes that that economic data is not bad and domestic demand remains robust (the Q1 national accounts show it currently tracking at 1.9%yr), he questions how long these areas of the economy can remain “insulated” from the difficulties of the manufacturing sector.”
“Regarding policy decisions in June, they are somewhat more ambiguous. Forward guidance was extended to rates being on hold at least through the first half of 2020, but the decision on TLTRO-III (new loans to banks) was to provide slightly less favourable pricing than its maturing predecessor TLTRO-II.”
“As with TLTRO-II, banks will receive loans at a base rate linked to the refi rate (currently 0%), with a conditional rate linked to the deposit rate (currently -0.4%) if banks exceed lending benchmarks. The key difference is that the new loans will come at a 10bp premium to the linked policy rates, and the linked rate that applies will be the average over the life of the respective TLTRO operation. Draghi’s rationale behind the TLTRO-III decision was that the loans are intended to be a backstop, and while there is a slight “disincentive” versus before, the terms are still very generous.”
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