Most observers bet the Draghi would further extend its current asset purchase programme, shoring up confidence in the face of troubled times ahead. Some believed it might reduce the monthly volume, showing its intent to scale down little by little its massive balance sheet.
Money in circulation (M2 in the US, M3 in the Eurozone) is not created by the central bank, but by the private banks when they lend. These loans are the fundamental countepart of M2 and M3. Loans are converted into deposits which provide the liquidity for us to function.
BoAML | We have remained quite bearish on Euro area inflation for the past few years, particularly compared with ECB forecasts (but also consensus), and have highlighted the many downside risks to the inflation outlook.
UBP | Unsurprisingly, the ECB kept its monetary policy unchanged. Corporate bonds buying are going to start on June 8th and the TLTRO on June 22nd.
UBS | As expected, yesterday’s ECB meeting provided neither new stimulus nor major new guidance on the policy outlook. The discussion was dominated by helicopter money (which according to Mr Draghi has not been discussed), the German criticism of the ECB’s low interest rate policy (which Mr Draghi diplomatically rejected) and the issue of whether or not interest rates could go down further (which could happen, if necessary).
BofAML | No surprises. We do not expect any ECB action this week. After the package in March, we think the ECB will have a few months before going back to the drawing board. Dovish Fed tones and EUR appreciation do not help the ECB, but action beyond a reiteration of forward guidance seems very unlikely.
The ECB could end up with a new headache if the euro continues to appreciate as it has done over the last few weeks. In a short space of time, the eurozone currency has gone from 1,08 dollars to 1,14 dollars. Analysts believe Draghi will have to take some kind of action if it goes over 1,15 dollars.
UBS | President Draghi surprised the market positively, both in terms of the magnitude of some of the expected moves (QE extension in the upper end of the range) and also implementing new measures (acquisition of non-financial IG bonds in its asset purchases, and new targeted TLTRO). For (retail) banks like the Spanish, the balance of ECB’s actions has to be considered as positive, especially if trends seen in the swap market are confirmed in Euribor fixings.
The market consensus is that the ECB will cut its deposit rate at tomorrow’s monthly meeting. The question is by how much. Consensus points to 10 bps to -0.4%, while other more agressive bets point to -0.55%. Switzerland has applied a negative deposit rate since January 2015, but experience seems to show this option is counterproductive for the banking sector.
The ECB’s main priority will be to fuel confidence in the financial markets and inflation will be its alibi for this. In February, eurozone CPI receded to -0.2% year-on-year and, in the short term, the region should be prepared for negative rates to continue.