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According to analysts from Rabobank, the European Central Bank will make minimal normalization steps in its policy rate that would reach 0% in March 2020.

Key Quotes:

“Even as the ECB looks ready to end the APP, we continue to favour a cautious ECB on rates as inflation remains below target; both in terms of the timing and pace of the hiking cycle.”

“The ECB may need to resort to additional unconventional tools to ensure the transmission of its monetary policy to the broader economy remains intact during the hiking cycle.”

“So whilst we do expect inflation to pick up further, this process of inflation convergence should only be very gradual. This lack of inflationary pressure is why we believe that the ECB will not be in a hurry to hike. Even though Mr. Weidmann has been very vocal in saying that a mid-2019 hike is still realistic, we note that this view is coming from one of the more hawkish members of the Council. The doves may rather wait until end-2019, and could push back against a call for a hike earlier in the year – even as one of the more influential doves, Mr. Praet, will leave the Executive Board in May. The recent string of weak economic data only reinforces this view. On balance, we thus expect the Governing Council to keep rates on hold until September 2019, or 9 months after we expect net purchases to end.”

“We don’t anticipate a first rate hike until September 2019, and we expect the cycle to consist of minimal steps of only 10bp to bring the deposit rate to 0% by March 2020.”

“We still remain in favour of 10bp hikes, for a number of reasons. The first reason is the same as our argument for a slightly longer delay: the current inflation outlook doesn’t give the Governing Council any sense of urgency; in fact, it would more likely create additional reticence on the side of the doves after the end of net asset purchases. While it could be argued that 20bp steps are technically broadly equal to 10bp steps as long as they are taken twice as slowly, this passes by the signalling effect. Since the market won’t know for certain that the ECB is indeed going to hike twice as slow, such an aggressive first step might raise expectations more than the ECB is aiming for. Secondly, the uncertain inflation outlook means that the ECB will not want to commit to, or create any appearance of, a pre-set path. For that reason, we could imagine the Governing Council pausing the first meeting after the initial hike (in our case that would be October 2019). With 20bp steps, missing the ‘logical’ next date could create a very drawn-out exit from sub-zero territory.”