Daily Insight
Group Economics Macro & Financial Markets Research
24 February 2016
Options for the ECB to cushion impact of negative rates Nick Kounis Head of Macro and Financial Markets Research Tel: +31 20 343 5616 nick.kounis @nl.abnamro.com
The ECB looks set to cut its deposit rate much further …
… but has indicated that it wants to take steps to cushion the blow for banks
A tiered rate system seems to be the most likely approach…
…but a refi rate cut, a new set of TLTROs and a willingness to take on more risk in accepting collateral or in its ABS programme are also possibilities
Deposit rate looks set to go deeper into negative territory The ECB looks set to ease monetary policy further. The growth and inflation outlook have deteriorated. Following the soft PMI data, Germany’s Ifo survey weakened significantly (see below) underlining that the eurozone’s economic recovery has started to struggle. These signs should trigger some of the more moderate members on the Governing Council to support the doves in pushing through more aggressive monetary easing. Indeed, earlier in the week, Governing Council member Liikanen hinted he was ready to support more easing next month. Although we think the ECB will also step up its QE programme, we expect deposit rate cuts will remain a key part of the central bank’s strategy. Our base case is that the ECB will cut the deposit rate by another 40bp in coming months, and hence will do more than markets currently expect. Offseting the downside for banks Negative interest rates can support the economy by pushing down the exchange rate and lowering bank lending rates. However, they can have adverse effects on commercial banks because they increase the costs of holding excess liquidity at the ECB. In addition, they compress margins because banks pass on the rate cuts through to lending rates but reduce deposit rates by less, as they are often already close to zero. Some commentators have expressed concerns that the damage to bank profits could have negative effects on the credit mechanism. Hence, it was no surprise last week when ECB Vice President Constancio noted that any rate cuts would be accompanied by measures to cushion the adverse impact on bank margins.
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Daily Insight – Options for the ECB to cushion impact of negative rates - 24 February 2016
Options to cushion the impact There are various measures the ECB can take to cushion the impact for banks. We think the most likely is a tiered deposit rate system, variations of which have been implemented in other countries (such as Japan and Denmark). Tiered deposit rate system One variant we discussed last year (see Global Daily Insight ‘Two-tiered ECB Depo rate?, 26 November 2015) would be to charge banks a different deposit rate depending on what level of excess liquidity they deposit. For instance, commercial banks that deposit a relatively low level of funds would face a less negative deposit rate, while those that deposit more funds would face a more negative one. This would reduce the costs for the banking system as a whole. Market interest rates would probably start-off somewhere in between the lower and higher rate, but would tend towards the more negative rate as excess liquidity builds and more banks reach the limit of the liquidity they can hold at the higher rate. Other options There are other – less likely – alternatives to offset the cost for banks. For instance, the ECB could cut the refi rate as well as the deposit rate, reducing the cost at which banks borrow. It could reduce the rate at which banks borrow on existing TLTROs, as well as introducing new longer-maturity TLTROs, for instance 5-year operations. These steps could reduce the cost of bank funding directly but possibly also indirectly by pushing down on the spreads on bank bonds. Furthermore, the ECB could ease the collateral requirements for its refi operations. Finally, the central bank could amend its ABS programme and start to buy junior as well as senior traches of the securities. This would increase the incentives for banks to create ABS and could potentially help some banks to further shrink balance sheets and recapitalise. Germany’s Ifo index also declined in February Turning to the economic data, the Ifo business climate indicator followed in the footsteps of the eurozone PMIs in February with a significant decline. The headline index fell to 105.7 from 107.3 in January. Perhaps more importantly, there was a deeper drop in the expectations component – a better tracker of GDP – to 98.8 from 102.4. This confirms that the German and overall eurozone economy likely slowed at the start of this year. We think the period of weak growth will likely continue in coming months, before a modest recovery later in the year, partly as additional ECB stimulus starts to gain traction.
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Daily Insight – Options for the ECB to cushion impact of negative rates - 24 February 2016
Day
Date
Time
Country
Monday Monday Monday Monday
22/02/2016 22/02/2016 22/02/2016 22/02/2016
10:00:00 10:00:00 10:00:00 15:45:00
EC EC EC US
Tuesday Tuesday Tuesday Tuesday Tuesday Tuesday Tuesday Tuesday
23/02/2016 23/02/2016 23/02/2016 23/02/2016 23/02/2016 23/02/2016 23/02/2016 23/02/2016
08:00:00 08:45:00 10:00:00 13:00:00 14:00:00 15:00:00 16:00:00
Wednesday
24/02/2016
Thursday Thursday Thursday Thursday Thursday Friday Friday Friday Friday Friday Friday Friday Friday
Key Economic Indicators and Events
Period
Latest outcome
Consensus
ABN AMRO
PMI manufacturing - index PMI services - index Composite PMI output Markit - Flash PMI
Feb P Feb P Feb P Feb P
51.0 53.0 52.7 51.0
52.0 53.4 53.3
51.8 53.0 52.9
DE FR DE TR HU US US US
GDP - % qoq, final estimate and details Business confidence manuf. - index Ifo - business climate - index Repo rate - % Base rate -% S&P/Case Shiller house price index Existing home sales - % mom Conference Board cons. confidence - index
4Q F Feb Feb Feb 23 Feb 23 Dec Jan Feb
0.3 100.0 105.7 7.5 1.35 0.8 0.4 92.2
0.3 106.9 7.5 1.35 0.9 -1.5 97.2
16:00:00
US
New homes sold - % mom
Jan
11
-3
25/02/2016 25/02/2016 25/02/2016 25/02/2016 25/02/2016
10:00:00 10:30:00 11:00:00 14:30:00 15:00:00
EC GB EC US US
M3 growth - % yoy GDP - % qoq Core inflation - % yoy New durable goods orders - % mom FHFA house price index - % mom
Jan 4Q -2nd Jan F Jan P Dec
4.7 0.5 1.0 -5.0 0.5
4.7 0.5 1.0 2.0 0.6
26/02/2016 26/02/2016 26/02/2016 26/02/2016 26/02/2016 26/02/2016 26/02/2016 26/02/2016
00:30:00 06:30:00 11:00:00 14:00:00 14:30:00 16:00:00 16:00:00 16:00:00
JP NL EC DE US US US US
CPI - % yoy Producer confidence manufacturing - index Economic sentiment monitor - index CPI - % yoy GDP - % qoq annualised Univ. of Michigan cons. confidence - index PCE deflator core - % mom PCE deflator core - % yoy
Jan Feb Feb Feb P 4Q S Feb F Jan Jan
0.2 3.2 105.0 0.5 0.7 90.7 0 1.4
-0.1 104.5 0.1 0.5 91.0 0 1.5
106.6 7.5 1.35
96.5
0.4 1.0 1.0
104.0 0.2 0.7 0 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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