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19 Feb 2016
ECB: How far can it go?- Rabobank
Analysts from Rabobank, expect a rate cut in the deposit rate of 10bp in March from the European Central Bank (ECB), but warned about other possible measures.
Key Quotes:
“Our base scenario is that the ECB cuts its deposit rate by 10bp in March. How markets will react to this outcome or other changes in the regime, such as the introduction of a staggered deposit rate regime, strongly depends on the additional measures that the ECB announces. An extension of the TLTRO obviously remains a live option, considering the recent turmoil in banking stocks and the fact that banks that borrowed in the TLTROs and fail to achieve their benchmarks as at 30 April 2016 will be required to pay back their borrowings in full in September 2016.”
“A removal of the capital key requirement would be a game changer, but politically so sensitive that ECB President Draghi may not want to go ahead without the Germany’s endorsement (Bundesbank’s Weidman is a non-voting member in March).”
“Moreover, a key question is how the market will interpret any change in the deposit rate and the accompanying language in terms of its implications for the future: is the ECB is willing to go even deeper or are we approaching the limits to the deposit rate?”
“Assuming that the ECB is not keen on signalling that the end to deposit rate cuts is in sight, this implies that the size of any cut will be seen by the market as a gauge of how far the ECB is willing to go. As we have noted above, the stronger the cut the higher the likelihood that the market will shift into another risk-off tail-spin, sending the euro higher and bond yields lower.”
“We would definitely rank a change in the deposit rate regime among the more aggressive scenario’s (because it will lead the market to believe that there is more to come) and thus as being self-defeating.”
Key Quotes:
“Our base scenario is that the ECB cuts its deposit rate by 10bp in March. How markets will react to this outcome or other changes in the regime, such as the introduction of a staggered deposit rate regime, strongly depends on the additional measures that the ECB announces. An extension of the TLTRO obviously remains a live option, considering the recent turmoil in banking stocks and the fact that banks that borrowed in the TLTROs and fail to achieve their benchmarks as at 30 April 2016 will be required to pay back their borrowings in full in September 2016.”
“A removal of the capital key requirement would be a game changer, but politically so sensitive that ECB President Draghi may not want to go ahead without the Germany’s endorsement (Bundesbank’s Weidman is a non-voting member in March).”
“Moreover, a key question is how the market will interpret any change in the deposit rate and the accompanying language in terms of its implications for the future: is the ECB is willing to go even deeper or are we approaching the limits to the deposit rate?”
“Assuming that the ECB is not keen on signalling that the end to deposit rate cuts is in sight, this implies that the size of any cut will be seen by the market as a gauge of how far the ECB is willing to go. As we have noted above, the stronger the cut the higher the likelihood that the market will shift into another risk-off tail-spin, sending the euro higher and bond yields lower.”
“We would definitely rank a change in the deposit rate regime among the more aggressive scenario’s (because it will lead the market to believe that there is more to come) and thus as being self-defeating.”