Forex Institutional Research: RBS ECB Preview
Key quotes from the RBS ECB report:
The ECB is unlikely to change any of its key policy settings on Thursday. It would seem strange if the ECB were to ease policy – for UK-related reasons – a few days after the Bank of England decided to leave its monetary policy on hold. And there has been little evidence of any financial market or broader macroeconomic destabilisation from the UK’s Brexit decision so far. Periphery bond markets in particular have been extremely well behaved.
However we believe the door will be left wide open to some further easing in the coming months. Recent UK-related events have tuned investors’ attention in to some of the area’s fault-lines and there are several reasons to remain cautious about how the region’s economies will evolve from here. Debt-related challenges in the Italian banking sector and broader issues concerning political and geopolitical stability are clearly some of those major fault-lines. Underlying growth and inflation momentum in the meantime is already pretty weak and market-based inflation expectations are hovering close to record lows.
Exactly how the ECB might ease policy again will be the main feature of this month’s meeting amidst growing operational difficulties in the PSPP and concerns about the profitability of the region’s banks. Options for a re-design of the PSPP include a change in the Capital Key requirement, a change in issue/issuer limits, a lift of maturity restrictions or allowing the purchase of bonds that yield less than the depo rate. We do not expect comprehensive changes this week but we do expect Draghi to tell us the ECB is studying these issues in committee and that September is the most likely date for a more substantive change.
We think those changes will accompany a further loosening of policy at that meeting on 8 th September. We specifically expect a 10bps cut in the deposit rate (from -0.4% to -0.5%) and a €20-25 billion up-lift in the APP to be enacted at that time.
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