In view of Deutsche Bank analysts, the package today from ECB will likely include the first cut in the deposit rate since 2016 at what will be President Draghi’s penultimate meeting in charge. 

Key Quotes

“Our European economists wrote that they expect the ECB to announce a broad policy easing package, but they think the likelihood of QE being a part of that package have declined, as a result of opposition to new QE from some Governing Council members, along with the risk that further QE which flattens the yield curve would be counterproductive for banks. Their view is that there’ll be a 10bp deposit facility rate cut, upgraded forward guidance, and tiering, which would be more positive for banks.”

“In terms of the specifics, they expect the 10bp deposit rate cut will be followed by another 10bps in December, after Draghi has left office, and think the “or lower” easing bias will be maintained. On tiering, they think that the ECB will keep the mechanism simple, although this may come at the expense of a dynamic solution (one that adjusts continuously to the volume of excess liquidity). And on forward guidance, they think that the more likely option will be using guidance to strengthen the symmetry of the inflation target.”

The highest level of uncertainty relates to QE. After Draghi’s dovish Sintra speech, QE became part of baseline expectations. However, our economists are concerned about the inconsistency between QE – big QE at least – and tiering if the latter signals an emergent sensitivity to banking, especially given the fact that some ECB officials have spoken out against new QE over the last few weeks. Even the hawks haven’t really pushed back against rate cut expectations.”

“Our economists adjusted their view on QE last week to anticipate a moderately more pro-banking outcome. That is, a steeper curve which results from no QE or QE targeted at the short end or QE targeted at private assets only. Less QE rather than more, which might be the compromise between hawks and doves, fits with the argument.”

“So this could be the meeting where the ECB implicitly acknowledges that the reversal rate across the whole curve is near to being breeched or has already been.”


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