ECB: 10bp deposit rate cut + QE extension coming - Nomura


FXStreet (Bali) - Nick Matthews, European Economist at Nomura, notes that a dovish Draghi on Thursday suggests a broader package of measures on 3 December is coming, with the Economist expecting a 10bp deposit rate cut in addition to QE extension to “end June 2017, or beyond”.

Key Quotes

"ECB President Draghi’s testimony before the European Parliament maintained and in some instances intensified the dovish rhetoric, with signs the ECB has lost confidence in the strength of the core inflation recovery previously projected, implying a “sustained normalisation” of inflation could take longer than the ECB anticipated in March."

"Mr Draghi confirmed that if the Governing Council concludes on 3 December that the medium-term price stability objective is at risk, it would act by using all the instruments available within the mandate to ensure an appropriate degree of monetary accommodation is maintained."

"We expect the forthcoming staff projections to confirm that the sustained normalisation of inflation will take longer than initially envisaged. Therefore, neither the staff projections nor signs of some short-term pick-up in headline inflation (about to converge towards a too-low rate of core inflation) will stand in the way of easing on 3 December, in our view."

"An extension of QE beyond September 2016 continues to be clearly signalled, while the Introductory Statement again noted other instruments could also be activated to strengthen the impact of the APP."

"We continue to expect QE to be extended and our preference remains for the ECB to continue with the date-based guidance at this stage. As Mr Draghi’s comments suggest a more fundamental reassessment of the ECB’s medium-term outlook is underway, we believe the QE extension beyond September 2016 is likely to be until at least “end June 2017, or beyond”. This would add at least €540bn of intended asset purchases (at the current pace of €60bn per month), with the total APP calibrated at €1.68trn, or just under 16% of euro area nominal GDP."

"We are also broadening our ECB call to include a 10bp deposit rate cut as to maintain an appropriate degree of accommodation. We consider it unlikely the Governing Council will want to “underdeliver”, particularly at a time it remains concerned over downside risks and inflation expectations. The bias to our revised call remains skewed towards the ECB doing “more” rather than “less”, suggesting an increase in the monthly pace of purchases (to at least €70bn per month) and expansion of the list of eligible securities for the APP are also possible."

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