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Researchers at UOB Group assessed the recent ECB event.

Key Quotes

“The ECB’s initial press release had struck a more dovish tone than markets had anticipated, highlighting “the need for a highly accommodative stance of monetary policy for a prolonged period of time”. As a result, 10-year German bond yields touched fresh-lows of -0.463% and EUR/USD fell to as low as 1.1102″.

“Appearing for the first time in the press release, ECB President Mario Draghi stressed the increasing importance of the symmetry of the ECB’s inflation target. This point is worth noting as the ECB did away with the explicit reference of “close to, but below, 2% over the medium term” in the statement. Draghi downplayed this detail, but it suggests that the ECB is more comfortable with seeing inflation temporarily moving above 2% before it considers tightening its policy stance”.

“The Governing Council has decided to task the “relevant Eurosystem Committees with examining options, including ways to reinforce its forward guidance on policy rates, mitigating measures, such as the design of a tiered system for reserve remuneration, and options for the size and composition of potential new net asset purchases”. Draghi did make clear that a cut to the deposit rate below the current -0.4% would be accompanied by tiering to mitigate the negative effects of a prolonged period of negative rates on bank profitability. But he also did not provide details on the design of this tiering system”.

“We expect that the ECB will opt for a more gradual release of additional stimulus, likely starting with a 10bps rate cut in its deposit facility rate from -0.40% currently to -0.50% at its September meeting. We also think the Governing Council could use the September meeting to announce the details of its next phase of asset purchases for a January 2020 launch-date to the tune of EUR40-50bn per month for twelve months, though this remains an uncertainty. Although bulk of the asset purchases will be centered on public debt, the ECB will likely buy relatively more corporate and covered bonds as it nears its self-imposed threshold on public-sector debt (33% of any one Eurozone member’s bonds). That said, we think the ECB will likely relax its position limits to cover the shortfall in sovereign debt available for purchase”.