ECB: Preserving a safety margin against deflationary risk

In 2014, we expect the Governing Council to focus on measures aimed at supporting credit to the private sector as the euro area economy gains momentum. Possible measures include enhancing its collateral framework, as well as launching a conditional VLTRO or a funding-for-lending scheme. These measures would complement EIB and EC initiatives aimed at bolstering SME financing, which we expect to be presented in December.

Should the downside risks on economic growth and on inflation materialise at the beginning of 2014, we think the ECB would possibly cut rates further and launch a securities purchase programme.

We think the macroeconomic effect of a negative deposit rate would be limited and could affect bank lending rates adversely. By contrast, we believe that a sizeable direct asset purchase programme could have a powerful effect and address the deflation risks.

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