ECB likely to announce a tiering system in September – Danske Bank

According to analysts from Danske Bank, the European Central Bank will announce a tiering system at the September meeting. They see that the exact design and ultimately the market impact are difficult to assess. 

Key Quotes: 

“Our preferred tiering proposal would result in a less than 1:1 effect on EONIA from the expected deposit rate cut. We argue that a ‘tiering premium’ may be a result of a political decision and may be worth around a quarter of the rate cut. We believe that the proposal would address what we consider to be the four key features of a tiering system.”

“In our view, a tiering system for the euro area should optimally reflect the following. 1. Full transmission of monetary policy, i.e. be neutral to current money-market transmission; 2. Incorporate flexibility for further adjustments in the monetary policy stance; 3. Keep the deposit facility rate as the key ECB rate; 4. Be worth the trouble, i.e. meaningful relief for banks. If the ECB is concerned about bank profitability, banks’ weighted average deposit rate should not be significantly less than the current rate (just shy of -40bp). However, a rate cut to stimulate the economy is the overarching aim of this exercise.”

“We find the current ECB pricing of a 17bp rate cut in September to be almost a ‘corner solution’ of what we see the ECB can deliver. With a ‘tiering premium’ of around 5bp, it may even be be on the slightly aggressive side.”

“We highlight that the ECB has been very creative on previous occasions, so there is considerable uncertainty about the exact nature of the tiering system. There were discussions on a tiering system in 2016 and Q2 19 and the ECB concluded not to implement it due to its potential complexities.”