Group Economics
Daily Insight
Macro & Financial Markets Research
The ECB’s Christmas present
Nick Kounis, +31 20 343 5616
23 October 2015 • • •
ECB President Mario Draghi clearly signalled that more stimulus would come in December Our base case is for an increase in the size and duration of the QE programme Following the press conference, the chances of a deposit rate cut have increased sharply
Draghi could not be more clear The ECB will almost certainly be delivering an early Christmas
Probability of deposit rate cut
present this year. ECB President Draghi could not have made it
%, derived from ECB-dated EONIA forwards
any clearer that the central bank was planning to step up monetary stimulus in December. This could include an adjustment of the QE programme, but also further policy rate cuts, something which had been ruled out before.
100 80 60 40
Markets cheer The ECB President’s remarks pushed the euro down below the 1.11 level and took 2y German government bond yields 6bp lower, to new record lows of -32bp. Indeed, EONIA forwards are now
20 0 Dec Jan 15 16
Mar 16
Apr 16 10bp
pricing in a 60% probability of a 10bp deposit rate cut by year end,
Jun 16
Jul 16
Sep 16
Oct 16
Dec 16
20bp
compared to 30% before the meeting. The chance rises to 100% by the middle of next year. The prospect of further monetary
Source: Bloomberg and ABN AMRO Group Economics
stimulus also boosted risk appetite, with equity markets surging. The euro Stoxx index was up more than 2%.
More QE, sharply higher chances of rate cut Our base case is that the ECB will step up its QE programme by
Downside risks confirmed Mr. Draghi made it clear that the downside risks to the inflation
increasing the size of monthly purchases (by EUR 20 bn to EUR 80bn). We also expect it to extend the duration beyond September
outlook stemming from emerging markets, commodity prices and
2016. Following the ECB press conference, we think the
financial conditions (read: the euro) had been confirmed. As we
probability that a deposit rate cut will be added to these measures
have noted previously, the EUR/USD has been trading above the levels (of around 1.10) assumed in the ECB’s September
has sharply increased. If the deposit rate is cut, it will most likely be by 10bp, taking it to -0.3%.
projections, while oil prices have been lower than assumed. Those projections were for a medium term under-shoot of the ECB’s
ECB needs to strike a balance
inflation target, so recent developments have been suggesting that
The ECB needs to strike a balance in the monetary stimulus
inflation was set for a bigger undershoot.
package it delivers in December. On the one hand, it needs to do enough to significantly ease financial conditions. An important
No more waiting, now planning
consideration is getting the euro down. Although as Mr. Draghi
Therefore the ECB asserted that it was no longer in a ‘wait and
noted it is not a policy target, he admitted it has a significant effect
see’ mode but had a ‘work and assess’ stance. Indeed, it would
on ‘price stability’, which is the ECB’s policy target. On the other
‘re-examine the degree of stimulus in December’ and committees
hand, the central bank needs to be mindful of keeping its powder
had been set up to look at the various options.
dry in case downside risks to inflation intensify in the future.
All options on the table
Fed and ECB playing tennis with EUR/USD
Crucially, all options are now on the table. The ECB could change
One key aspect in this balancing act might be the Federal
the size, duration and composition of the QE programme as set
Reserve’s deliberations and their impact on EUR/USD. We expect
out before, but also cut its key policy rates further. This would
the Fed to delay starting to hike rates until 2016. The bigger the
mean reducing the deposit rate deeper into negative territory. It
upward effect this has on EUR/USD, the more aggressive the ECB
currently stands at -0.2%.
might need to be.