Rabobank analysts point out that the ECB President Draghi all but announced new stimulus at last week’s Sintra conference which was a clear U-turn from the ECB’s hope that their next move would be a rate hike – and perhaps even surprising some of his peers, backing them into a corner.
Key Quotes
“While markets were already preparing themselves for a rate cut, Draghi has accelerated the market’s time table. A deposit rate cut is now fully priced by September, with one follow-up cut expected.”
“We have even pencilled in two more cuts than the market anticipates, and we see the deposit rate reach -80bp by June 2020. As a result, we believe that short rates have a bit further to fall.”
“Importantly, we believe that mitigating measures may weaken the pass-through of policy rates to Eonia and Euribors slightly, which may cause some widening in tenor basis spreads the lower the ECB cuts its deposit rate. Yet, we believe the ECB will preserve enough excess liquidity to keep a firm grip on money market rates.”
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