When he steps down as ECB President at the end of October, Mario Draghi should become a postman, because he always delivers! In today’s ECB monetary policy statement, a swathe of easing measures has been announced. Markets have been anticipating these measures, but looking at the market reaction, it seems that the ECB has not disappointed. QE to infinity it seems.
The measures announced
- A cut to the deposit rate of -10bps to -0.50%. This was broadly expected, even though some had -20bps pencilled in.
- There will also be a two tier system for reserve remuneration. This “tiering” of the deposit rate will help prevent negative implications of the rate cut across the banking sector.
- A resumption of QE asset purchases at €20bn per month “for as long as necessary”. Although consensus was for around €30bn per month, it is the open ended nature to the program which is eye catching. Unanimity no, and by no means is this still likely to have pleased countries such as Germany, France or the Netherlands, however, at least to a certain extent they were not completely ignored. The prospect of QE potentially forever, reflects Draghi’s commitment to the cause (even if his stint as ECB President is drawing to a close). Details of the capital key will also be interesting.
- TLTROs maturity extended from two to three years.
We see this as an impressive announcement of dovish measures, with Draghi living up to his “whatever it takes” reputation. Howveer, it is a move that also is a nod to try and appease as many on the Governing Council as possible. The hawks will have fought for no QE, but in the event a lower amount than perhaps it could have been. The “as long as necessary” is smart as it means that if the Eurozone economy picks up then this can easily be halted. Cutting the deposit rate was a given, but the teiring was also necessary for the still ailing banking sector in the region.
- Growth – revised down with “growth risks tilted to the downside”. This remains pretty weak.
- Inflation – Headline HICP “is likely to decline before rising again before the end of the year”. Over the medium term underlying inflation is expected to increase. However the outlook for projections has been revised down.
The reaction has been fairly dovish, with Bund yields lower, euro lower and equities higher.
- Bund yields – The 10 year Bund yield initially moved higher, but then fell around 7bps, but is now settling.
- EUR – The move seems to have had a similar spiking impact on the euro, first higher but now lower. As the press conference has gone on the euro has continued to fall. A move lower by around 90 pips on EUR/USD from where it was just prior to the rates announcement.
- DAX – The ECB resuming QE for as long as necessary has also helped the DAX higher, and is currently almost ticks higher as the press conference has kicked off.