3 Dec 2015
ECB taking a gamble? - Rabobank
FXStreet (Guatemala) - Analysts at Rabobank explained that today, the ECB announced five fresh easing measures. Firstly, it cut the deposit rate by 10bp to -0.3%, whilst holding all other rates unchanged.
Key Quotes:
"Secondly, it announced a 6-month extension (until the end of March 2017) of the asset purchase program (APP), a decision to reinvest the principal payments on the securities purchased under the APP as they mature, an inclusion of regional and local government debt in the APP and an extension of the full allotment procedure until the end of 2017.
Markets were clearly disappointed. Government bond markets sold off with Bund yields jumping almost 20bp, whilst the euro jumped more than 3 big figures vis-à-vis the dollar, reaching above 1.09 in the aftermath of the ECB press conference.
Our take of this meeting is that the hawks in the Governing Council have prevented the doves this time to execute a bolder plan. In our opinion this is not necessarily a bad outcome – as we believe that too much focus on trying to weaken the currency could ultimately backfire (either in terms of retaliation by other central banks or in lower commodity prices through a stronger dollar). Moreover, we have often expressed our concerns about the effectiveness and market-distorting nature of negative rates and aggressive asset purchases.
At the same time, the ECB may now be taking a gamble. Whereas in the past it has shown a preference to err on the side of caution and try to be ahead of the markets, it is now in the backseat again. If the economic fundamentals and inflation improve, the ECB still wins, but if those fundamentals don’t improve sufficiently quickly, there is now a bigger risk that long-term inflation expectations would slip again. With opposition in the Governing Council obvious, any further easing measures could be expected to be facing delays.
Today's deposit rate cut looks to have been the “final one” under the conventional policy pillar. We expect policy rates to remain at their current levels in the foreseeable future."
Key Quotes:
"Secondly, it announced a 6-month extension (until the end of March 2017) of the asset purchase program (APP), a decision to reinvest the principal payments on the securities purchased under the APP as they mature, an inclusion of regional and local government debt in the APP and an extension of the full allotment procedure until the end of 2017.
Markets were clearly disappointed. Government bond markets sold off with Bund yields jumping almost 20bp, whilst the euro jumped more than 3 big figures vis-à-vis the dollar, reaching above 1.09 in the aftermath of the ECB press conference.
Our take of this meeting is that the hawks in the Governing Council have prevented the doves this time to execute a bolder plan. In our opinion this is not necessarily a bad outcome – as we believe that too much focus on trying to weaken the currency could ultimately backfire (either in terms of retaliation by other central banks or in lower commodity prices through a stronger dollar). Moreover, we have often expressed our concerns about the effectiveness and market-distorting nature of negative rates and aggressive asset purchases.
At the same time, the ECB may now be taking a gamble. Whereas in the past it has shown a preference to err on the side of caution and try to be ahead of the markets, it is now in the backseat again. If the economic fundamentals and inflation improve, the ECB still wins, but if those fundamentals don’t improve sufficiently quickly, there is now a bigger risk that long-term inflation expectations would slip again. With opposition in the Governing Council obvious, any further easing measures could be expected to be facing delays.
Today's deposit rate cut looks to have been the “final one” under the conventional policy pillar. We expect policy rates to remain at their current levels in the foreseeable future."