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Free AccessMNI PREVIEW: ECB Set To Cut Rates, As Market Awaits QE Size
By Luke Heighton
FRANKFURT(MNI) - The European Central Bank is set to cut its deposit rate
by 10 basis points or more at its meeting on Thursday, and to make further
dovish adjustments to its forward guidance, with investors waiting to learn the
size and duration of what is likely to be a fresh round of net asset purchases.
Here are key points to look for from Mario Draghi's penultimate monetary
policy meeting:
--WILL IT BE A PACKAGE?
Accounts of July's meeting suggested multiple simultaneous measures would
be "more effective than a sequence of selective actions." This prospect is
supported by MNI sources, though some said any package may disappoint those
hoping for macroeconomic fireworks. Expect continued emphasis on the persistence
of downside risks, such as the U.S.-China trade conflict and Brexit, and words
to the effect that monetary policy isn't "the only game in town."
--HOW LOW WILL THEY GO?
Ten basis points appears to be the minimum, with a cut of some kind almost
a given. Tiering the deposit rate, along the lines of the Swiss National Bank,
is the most likely measure the ECB has been looking at to mitigate the effect of
negative rates on banks, and could allow for a deeper cut - now or in the
not-too-distant future. But tiering may be too complex and too divisive for the
time being.
--ASSET PURCHASES
Sources have told MNI to expect about E20-30 billion a month in bonds, with
an initial run of say six months, or E15 billion for 9-12 months. This would be
at the lower end of market expectations. Any decision on whether to raise issuer
limits or buy different asset classes (covered bonds and/or CSPPs to
bank-dependent small-medium firms) is set to be deferred. The possibility that
more QE might be announced but not triggered shouldn't be ruled out. It could
also be made more explicitly contingent on further economic deterioration.
--FORWARD GUIDANCE
A rate cut would be likely to be accompanied by a change in forward
guidance. The ECB could say it would not raise rates until inflation has reached
a specified target over a given period of time, although such a change might be
the subject of tough discussion within the Governing Council, with some members
suspecting that Draghi is attempting to leave policy settings on auto pilot
before Christine Lagarde succeeds him in the job. Instead, there could be more
focus on the "symmetry"of the inflation target. Sources told MNI forward
guidance would be "amended and strengthened," and that it could be extended.
--TLTROs
Announcing TLTRO-III in June, Draghi was asked whether they might yet be
repriced should Europe's economy continue to slide. With targeted longer-term
loans coming into operation exactly a week after this Thursday's meeting, now
might be the time to do so. But as one official told MNI, while it might be
possible to cut the headline rate by 5 basis points to 5 basis points over the
ECB's refinancing rate, "I can't see us cutting the refinancing rate into
negative territory."
--A UNANIMOUS DECISION?
It wasn't last time, and is unlikely to be this time around. Some suspect
central bankers are becoming bolder as Draghi term of office draws to a close.
More likely, those who always opposed the more unconventional aspects of
unconventional monetary policy are speaking out once more. But we may get hints
as to the levels and nature of any disagreement in Draghi's read-through of the
decision-making process, in addition to questions from reporters.
--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com
[TOPICS: M$X$$$,MC$$$$,MT$$$$,MX$$$$,M$$EC$]
To read the full story
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Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.