ECB preview: Rate cut, tiered system and new round of QE – BBVA

Sovereign bond yields rose on Monday as investors lowered their expectations that the European Central Bank (ECB) will unleash a big stimulus package this Thursday at its policy meeting, according to BBVA Analysts.  They point out the market is not pricing in an immediate QE, but a 10 bps depo rate cut by the ECB is a virtual certainty. They expect a 20bp rate cut.  

Key Quotes:  

“We expect the ECB to cut 20bp the deposit rate to -0.60%, along with the implementation of a tiered system for the deposit facility and the announcement of a new round of QE – or an indication that QE could be easily triggered, in addition to strengthening forward guidance on rates (hikes conditional on inflation target). This package derives from worse-than-expected data in Germany, a somewhat weaker momentum for 2H19 and the intensification of downward risks (trade war escalation and Brexit).”

“The updated forecasts will likely revise GDP growth down by around 0.2pp in 2020-21 to 1.3% after 1.1% in 2019 and core inflation also down by around 0.1pp over the forecast horizon to average around 1.5% in 2021. Regarding market expectations, a 10 bps deposit rate cut is a virtual certainty in September, while bets of a 20 bps cut remain high (49%).”