Daily Insight
Group Economics Macro & Financial Markets Research
10 March 2016
The ECB’s next move Nick Kounis Head Macro & Financial Markets
The ECB will very likely deliver monetary stimulus in Thursday’s meeting
Our base case is a 20bp deposit rate cut coupled by steps to cushion the impact on banks
Research Tel: +31 20 343 5616 nick.kounis@nl.abnamro.com
We also expect an increase and extension of QE, which should be facilitated by removing the deposit rate floor for purchases
Aline Schuiling Senior Economist Tel: +31 20 343 5606 aline.schuiling@nl.abnamro.com
All eyes on the ECB The ECB is almost certain to act, but there is uncertainty about exactly what it will do. We think the central bank will announce a broad package of measures including a 20bp cut in the deposit rate to -0.5%. It will probably also announce measures to support the banking system, such as introducing a tiered deposit rate system and a new long-term loan facility for banks. Moreover, we expect the ECB to increase its monthly asset purchases by EUR 10bn and extend the duration of asset purchases to June 2017. This should be facilitated by removing the deposit rate floor for purchases. Such a package would be in line with the ECB’s past policy actions. Over the last year or two, the ECB has generally introduced policies on a number of fronts in an attempt to magnify the impact on financial conditions and the economy, as well as to create a ‘big statement’ on announcement in order to shape expectations. In addition, the deterioration in the outlook for economic growth – and especially inflation - has been large. For instance, the ECB’s 2016 inflation forecast will likely come down by around one percentage point (taking it to zero) while the 2017 forecast may be reduced by 0.3 points to 1.3%. That means a significant response will be needed.
ECB’s projections for inflation %
2.0
1.7
1.6
1.5 1.1
1.0
1.0 0.5 0.0 2016 September 2015
2017 December 2015
March 2016
Source: Thomson Reuters Datastream, ABN AMRO Group Economics
Insights.abnamro.nl/en
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Daily Insight – The ECB’s next move - 10 March 2016
Markets have priced in a more moderate cut in the deposit rate … Interest rate futures look to be pricing in a 10bp reduction at next week’s meeting (around 12bp is factored in) and a total of 18bp of reductions by June. Expectations of QE are difficult to decipher from market prices, but surveys of economists and strategists suggest that a EUR 10bn increase in the pace of monthly asset purchases to a total of EUR 70bn is seen as most likely. … but we think the ECB will act more aggressively than expected There is a lot of uncertainty about exactly what the ECB will do, and the central bank did disappoint in December. However, we think that this time it will deliver. We think it will cut the deposit rate by more than expected, while we also think it will strongly signal it is willing to do more if necessary. The more neutral members of the Governing Council will be ready this time to swing behind ECB President Draghi and the other doves and support more aggressive stimulus. This is because the business surveys have deteriorated significantly since the start of this year, while core inflation fell back significantly in February (to 0.7%, down from 1.0% in January). It is now almost back to the lows seen at the turn of last year (of 0.6%) and has wiped out its previous gains. We think that the weak inflation data adds to the already strong case for the ECB to significantly step up its monetary stimulus and act more aggressively than currently expected. Getting the euro back down is the only way to get core inflation up significantly over the coming months. In addition, the ECB needs to provide a strong signal that it will do whatever it takes in order to push up long-term inflation expectations.
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Daily Insight – The ECB’s next move - 10 March 2016
Day
Date
Time
Country
Monday Monday Monday
07/03/2016 07/03/2016 07/03/2016
08:00:00 09:00:00 21:00:00
DE CH US
Tuesday Tuesday Tuesday Tuesday Tuesday Tuesday
08/03/2016 08/03/2016 08/03/2016 08/03/2016 08/03/2016 08/03/2016
00:50:00 08:00:00 11:00:00 12:00:00
Wednesday Wednesday
09/03/2016 09/03/2016
Thursday Thursday Thursday Thursday Thursday Thursday Thursday Thursday Thursday Thursday Thursday Friday Friday Friday
Key Economic Indicators and Events
Period
Latest outcome
Consensus
ABN AMRO
Manufacturing orders - % mom Foreign currency reserves - CHF mln Fed Reserve consumer credit - USD bn
Jan Feb Jan
-0.1 571.1b 10.5
-0.2
0.0
15.3
JP DE EC US CN CN
GDP - % qoq Industrial production - % mom GDP - % qoq NFIB small business optimismem - index Exports - % yoy Imports - % yoy
4Q F Jan 4Q P Feb Feb Feb
-0.3 3.3 0.3 92.9 -25.4 -13.8
-0.4 1.4 0.3 94.2 -14.5 -10.1
0.3 94.0
16:00:00
CA NZ
Policy rate - % Policy rate - %
Mar 9 Mar 10
0.5 2.3
0.5 2.5
0.5 2.5
10/03/2016 10/03/2016 10/03/2016 10/03/2016 10/03/2016 10/03/2017 10/03/2016 10/03/2016 10/03/2016 10/03/2016 10/03/2016
02:30:00 02:30:00 06:30:00 13:45:00 13:45:00 14:30:00 14:30:00 15/03/2016 15/03/2016 15/03/2016
CN CN NL EC EC EC US CN CN CN KR
CPI - % yoy PPI - % yoy CPI - % yoy ECB Deposit rate - % ECB Refi Rate - % ECB Press Conference Initial jobless claims M2 money growth - % yoy New loans - CNY bn Aggregate financing - CNY bn Policy rate - %
Feb Feb Feb Mar 10 Mar 10
1.8 -5.3 0.6 -0.3 0.05
1.9 -4.9 -0.4 0.05
0.6 -0.5 0.05
Feb Feb Feb Mar 10
278.0 14.0 2510 3417 1.5
275.0 13.7 1200 1780 1.5
1.5
11/03/2016 11/03/2016 11/03/2016
08:00:00 10:30:00
DE GB PL
CPI - % yoy Trade balance - GDP mln Reference rate - %
Feb F Jan Mar 11
0.0 -2709 1.5
1.5
Source: Bloomberg, Reuters, ABN AMRO Group Economics (we provide own forecasts only for selected k ey variables and events)
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