Daily Insight
Group Economics Macro & Financial Markets Research
19 February 2016
ECB gears up for action Nick Kounis
additional monetary stimulus
Head of Macro and Financial Markets Research
The account of the ECB’s January meeting suggests it is gearing up for
Tel: +31 20 343 5616
The Governing Council saw increasing downside risks for growth and inflation given tighter financial conditions and falling inflation expectations
nick.kounis @nl.abnamro.com
We expect further deposit rate cuts and a stepping up of QE starting at the March meeting Account of ECB meeting signals rising concerns The account of the ECB’s January monetary policy meeting revealed that the Governing Council’s concerns about the inflation outlook had built significantly since the previous meeting in December. In addition, most officials seem ready to push forward with further monetary easing. We think that further stimulus in March is a done deal, the main open question is exactly what the ECB will do. Increasing risks to the economic outlook The Governing Council judged that ‘the risks to the outlook for economic growth were ..seen as remaining tilted to the downside and as having increased since December’. These risks ‘stemmed from the external environment and included the possibility of a stronger than expected slowdown in global growth, in particular in emerging market economies, and of renewed increases in financial and commodity market volatility’. Chief Economist Peter Praet noted that the downside risks that had been identified at the ECB’s September and December meetings ‘might at present be materialising’. Worries about second round effects It was also noted that inflation had been weaker than expected, partly due to lower oil prices, but also because of ‘persistently subdued underlying price pressures’. In addition, the risk that inflation would get stuck at lower levels was seen to be rising. The account notes that ‘weaker than anticipated growth in wages, in conjunction with declining inflation expectations, could also signal increased risks of second-round effects’ . In addition, ‘there were stronger signs again that repeated downward revisions of the inflation outlook were feeding through to inflation expectations, which had again increased the probability of the euro area economy remaining in a low inflation environment for an extended period of time’. It was concluded that ‘the balance of risks to the inflation outlook (were) tilted to the downside’.
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Daily Insight – ECB gears up for action - 19 February 2016
Case made for pre-emptive action There were clearly some dovish members pushing for action already at the January meeting. The account records that ‘the point was made that, in a situation in which risks were predominantly on the downside and new downside risks were emerging, it would be preferable to act pre-emptively, taking emerging risks into account, rather than to wait until after risks had fully materialised’. In addition, one official made the case for aggressive action saying that ‘it appeared logical from a medium-term perspective for the Governing Council, after a prolonged period of undershooting of its inflation aim, to consider a limited period of overshooting in future’. Waiting until March Nevertheless, the Governing Council felt that a further assess of the situation and the policy options was necessary, saying it was ‘necessary to review and possibly reconsider the monetary policy stance at the Governing Council’s next monetary policy meeting in early March.’ ECB to move interest rates deeper into negative territory We expect the ECB to cut its deposit rate by a cumulative 40bp to -0.7% over the coming months. We see the reductions taking place in two steps of 20bp, in March and June. This should be accompanied by measures to cushion the blow for the banking system. The most likely step is a move to a two-tiered deposit rate system, so that commercial banks pay the higher penalty rate on a smaller proportion of their excess reserves. Other possibilities to support the banking sector are refi rate cuts and new TLTROs. Finally, we expect a stepping up of QE (of EUR 10bn per month). This should be facilitated by dropping the deposit rate floor for purchases, which would increase the eligible universe of government bonds the ECB could buy.
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Daily Insight – ECB gears up for action - 19 February 2016
Day
Date
Time
Country
Monday Monday Monday Monday Monday Monday
15/02/2016 15/02/2016 15/02/2016 15/02/2016 15/02/2016 15/02/2016 15/02/2016 15/02/2016
00:50:00 05:30:00 11:00:00 15:00:00
JP JP EC EC CN CN CN CN
GDP - % qoq Industrial production - % mom Trade balance Draghi speaks in EU Parliament Committee Exports Imports Aggregate financing - CNY bn New yuan loans - CNY bn
17/02/2016
Key Economic Indicators and Events
Period
Latest outcome
Consensus
4Q P Dec F Dec
-0.4 -1.7 21.0
-0.2
Jan Jan Jan Jan
-11.2 -18.8 1820 597.8
-2.0 -3.9 2200 1900.0
Tuesday Tuesday Tuesday Tuesday Tuesday Tuesday
15/02/2016 16/02/2016 16/02/2016 16/02/2016 16/02/2016 16/02/2016
17/02/2016 10:30:00 11:00:00 14:30:00 16:00:00
CN GB DE US US KR
Money supply M2 - % yoy Jan CPI - % yoy Jan ZEW index (expectation economic growth) Feb Empire State PMI - Manuf. general business conditions - index Feb NAHB home builders' confidence index Feb Policy rate - % Feb 16
13.3 0.2 10.2 -19.4 60 1.5
13.5 0.3 0.0 -9.9 60 1.5
Wednesday Wednesday Wednesday Wednesday Wednesday Wednesday Wednesday
17/02/2016 17/02/2016 17/02/2016 17/02/2016 17/02/2016 17/02/2016 17/02/2016
00:50:00 10:30:00 14:30:00 14:30:00 14:30:00 15:15:00
JP GB GB US US US US
Machinery orders private sector - % mom Claimant count unemployment rate - % Change in claimant count - thousands Prod. prices index - % mom Prod. prices index excl food and energy - % mom Housing starts - % mom Industrial production - % mom
Dec Jan Jan Jan Jan Jan Jan
-14.4 2.3 -4.3 0.1 0.4 -3.8 0.9
3.9 2.3 -2.2 -0.2 0.1 1.8 0.3
Thursday Thursday Thursday Thursday Thursday Thursday
18/02/2016 18/02/2016 18/02/2016 18/02/2016 18/02/2016 18/02/2016
00:50:00 02:30:00 02:30:00 07:30:00 14:30:00 14:30:00
JP CN CN NE US US
Merchandise trade exports - % yoy CPI - % yoy PPI - % yoy Unemployment rate Initial jobless claims - thousands Philadelphia Fed - business confidence - index
Jan Jan Jan Jan Feb 13 Feb
-12.9 1.8 -5.3 6.5 262 -2.8
-11.3 1.9 -5.4
Friday Friday Friday Friday Friday Friday
19/02/2016 19/02/2016 19/02/2016 19/02/2016 19/02/2016 19/02/2016
10:30:00 14:30:00 14:30:00 14:30:00 14:30:00
NL GB US US US US
Consumer confidence - index Retail sales - % mom Inflation excl food and energy - % mom Inflation excl food and energy - % yoy Inflation (CPI) - % mom Inflation (CPI) - % yoy
Feb Jan Jan Jan Jan Jan
4 -1.0 0.1 2.1 -0.1 0.7
ABN AMRO
-15 60 1.5
1.5
6.6 -2.7
-2.7 3
0.7 0.2 2.1 -0.1 1.3
0.1 2.0 0.0 1.3
Source: Bloomberg, Reuters, ABN AMRO Group Economics (we provide own forecasts only for selected k ey variables and events)
Find out more about Group Economics at: https://insights.abnamro.nl/en/
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