Macro Weekly
Group Economics
4 March 2016
The ECB’s March package • Nick Kounis Head Macro & Financial Markets Research
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Tel: +31 20 343 5616 nick.kounis@nl.abnamro.com
• • •
We preview the ECB’s meeting next week, which will very likely deliver monetary stimulus, but there is uncertainty about exactly what it will do Our base case is a 20bp deposit rate cut coupled by steps to cushion the impact on banks such as a tiered rate system… …and a new long-term loan facility for banks We also expect an increase and extension of QE, which should be facilitated by removing the deposit rate floor for purchases We think further monetary stimulus is justified and will have a positive effect, though the ECB needs support from other policymakers
Once again all eyes are on the ECB Next week’s ECB meeting promises to be another big even in the economic and financial market calendar. The ECB is almost certain to act, but there is uncertainty about exactly what it will do. At the same time there is increasing scepticism about the impact of monetary policy. Some argue it is ineffective at best and harmful at worst, leading to worries that we have reached a limit to what central banks can do to tackle the increased downside risks to the outlook for growth and inflation. In this preview, we ask five big ECB questions. Box: The ECB’s March Package We expect the following measures: •
A 20bp deposit rate cut to -0.5%
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Introduction of a tiered deposit rate system
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A new long-term loan facility for banks
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A EUR 10bn increase in monthly asset purchases
•
Increase in duration of asset purchases to June 2017
•
Removal of the deposit rate floor for asset purchases
What will the ECB do? We think the ECB will announce a broad package of measures next week including rate cuts, measures to support the banking system and an increase in asset purchases (see box above). 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
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Macro Weekly – The ECB’s March package – 4 March 2016
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. What are markets pricing in? 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 (see table below). ECB policy actions and market expectations Policy tool
Beating expectations
Meeting expectations
Missing expectations
Deposit rate cut
20bp cut or more
10bp cut
No cut
Extension of QE
As long as necessary
June 2017
March 2017
Monthly purchases
EUR 20 bn increase
EUR 10bn increase
No change
Forward guidance
Not reached lower bound
No guidance on lower bound
Lower bound reached
Source: ABN AMRO Group Economics
Will the ECB deliver? Yes. Admittedly 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. We think that the more neutral members of the Governing Council will be more 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, while core inflation has fallen and has wiped out its previous gains. Will negative rates do more harm than good? A more deeply negative deposit rate on bank excess reserves will on balance likely be positive for the economy if the system is well designed. The experience so far is encouraging. For instance, in the eurozone, bank lending rates to households and companies have come down, bank lending has improved modestly and the euro is weaker than it would otherwise have been. Evidence from Sweden, that has more negative rates than the eurozone, has seen even more positive trends. Nevertheless, it is certainly the case that negative rates have an adverse impact on bank profits and that if that impact is too big it can undermine the bank lending channel and hence the economy. So it is important that the ECB takes steps to minimise the impact on banks. That is why we think that a two-tiered deposit rate system is likely. The system could be designed so that a majority of excess reserves could receive the refi
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Macro Weekly – The ECB’s March package – 4 March 2016
rate (currently +5bp) and only a fraction of excess reserves (say a third) would face the negative deposit rate. The ECB could also take other steps to support the banking system. For instance it could provide even longer (and possibly cheaper) refi loans for banks. It could also reduce the loan rate on existing TLTROs. Has monetary policy reached its limits? No, we think the ECB still has room for manoeuver. With a tiered system, it could cut the deposit rate further beyond March. In addition, it can expand QE. At the March meeting, we expect it to remove the deposit rate floor for asset purchases, so it will be able to buy government bonds yielding less than the deposit rate. This will increase the eligible universe it can buy. In addition, it could in the future make further adjustments to the programme to allow a further step up or extension of QE (such as dropping the capital key, as a way to allocate purchases, or the issuer limit). More generally, there is no limit to the amount of money the ECB can produce, and central banks have proved innovative in the past in thinking up ways to provide stimulus. For instance, the ECB could be more aggressive in its ABS programme, buying more risky tranches of the securities (consisting of packages of loans), which would help banks to take loans off their balance sheets. We think ECB stimulus has and will continue to have a positive effect on demand and inflation. Although the economy is still weak and inflation low, this reflects that the eurozone is facing increasing headwinds. Growth and inflation would likely be lower still if the ECB had not acted. Having said that, the ECB does need the help of other policymakers. For instance, an increase in fiscal stimulus, in the shape of public investment programmes could help foster a faster cyclical recovery. In addition, structural reforms can help to lift the long-term growth rate from its meagre levels.
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Macro Weekly – The ECB’s March package – 4 March 2016
Main economic/financial forecasts Main economic/financial forecasts GDP grow th (%)
2014
2015
2016e
2017e
United States
2.4
2.4
1.7
2.1
United States
Eurozone
0.9
1.5
1.2
1.6
Eurozone
Japan
3M interbank rate
24/02/2016 02/03/2016
+3M
+12M
2016e
0.63
0.63
0.6
0.6
0.6
2017e 1.4
-0.20
-0.21
-0.55
-0.55
-0.55
-0.55
-0.1
0.5
0.8
0.6
Japan
0.10
0.10
-0.1
-0.1
-0.1
-0.1
United Kingdom
2.9
2.2
1.6
2.5
United Kingdom
0.59
0.59
0.6
0.9
0.6
1.6
China
7.3
6.9
6.5
6.0
World Inflation (%)
3.4 2014
3.1 2015
3.0 2016e
3.5 2017e
24/02/2016 02/03/2016
+3M
+12M
2016e
2017e
United States
1.6
0.1
1.4
1.6
US Treasury
1.74
1.85
1.9
2.2
2.2
2.5
Eurozone
0.4
0.0
0.1
1.5
German Bund
0.15
0.21
0.2
0.5
0.5
0.8
Japan
2.8
0.8
0.5
1.8
Euro sw ap rate
0.55
0.60
0.5
0.7
0.7
1.0
United Kingdom
1.5
0.0
0.5
1.8
Japanese gov. bonds
-0.04
-0.06
0.2
0.3
0.2
0.3
China
2.0
1.4
2.0
2.5
UK gilts
1.36
1.46
1.5
1.7
1.7
2.3
World Key policy rate
3.8 02/03/2016
3.6 +3M
3.8 2016e
3.6 2017e
24/02/2016 02/03/2016
+3M
+12M
2016e
2017e
Federal Reserve
0.50
0.50
0.50
1.25
EUR/USD
1.10
1.08
1.05
1.05
1.05
1.05
European Central Bank
-0.30
-0.70
-0.70
-0.70
USD/JPY
112.2
113.5
117
122
120
120
Bank of Japan
-0.10
-0.30
-0.30
-0.30
GBP/USD
1.39
1.41
1.35
1.50
1.48
1.50
Bank of England
0.50
0.50
0.50
1.50
EUR/GBP
0.79
0.77
0.78
0.7
0.71
0.70
People's Bank of China
4.35
4.10
3.85
3.85
USD/CNY
6.54
6.55
6.55
6.75
6.70
6.80
10Y interest rate
Currencies
Source: Thomson Reuters Datastream, ABN AMRO Group Economics.
Key Global Macro Events 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
-0.7 574964 21.3
-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
-0.4 -1.2 0.3 93.9 -11.2 -18.8
-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 2.5
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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Macro Weekly – The ECB’s March package – 4 March 2016