The ECB acted in line with its inflation mandate and cut the refi rate by 25bp to 0.25%.
The cut came as the ECB expects a prolonged period of low inflation, which will be broad-based across the euro area. Mario Draghi repeated that inflation risks are broadly balanced and that the ECB does not see deflation for the euro area.
At today's meeting, the ECB also discussed a deposit rate cut and Draghi repeated that it is 'technically ready', even though he does not expect negative deposit rates. The ECB reviewed its forward guidance and confirmed that it continues to expect key interest rates to remain at current (now down at 0.25%) or lower levels for an extended period.
According to Draghi, the discussion on new LTROs was not of any significance today. Hence, it seems the ECB will use standard measures when it wants to tackle macroeconomic issues such as inflation.
Looking ahead, we expect average inflation to remain below 1% and increase only moderately to 1.1% in 2015. Given this expectation, we do not expect the ECB to act on inflation again. However, if deflation becomes an issue, we think the ECB will act again and new rate cuts are a possibility. In our view, this includes smaller cuts in the refi rate than we have previously seen and it could be that the ECB will introduce a negative deposit rate. In a broad-based deflation scenario, the ECB would probably start to discuss using some form of quantitative easing.
From a market perspective, the narrowing of the spread between the refi and deposit rate implies that the ECB has effectively regained control over the money market curve. It will now be of much less concern if the amount of excess liquidity continues to decline, as the EONIA O/N will be capped by the refi rate. Thus, the likelihood of new LTROs seems to have declined.
The cut came as the ECB expects a prolonged period of low inflation, which will be broad-based across the euro area. Mario Draghi repeated that inflation risks are broadly balanced and that the ECB does not see deflation for the euro area.
At today's meeting, the ECB also discussed a deposit rate cut and Draghi repeated that it is 'technically ready', even though he does not expect negative deposit rates. The ECB reviewed its forward guidance and confirmed that it continues to expect key interest rates to remain at current (now down at 0.25%) or lower levels for an extended period.
According to Draghi, the discussion on new LTROs was not of any significance today. Hence, it seems the ECB will use standard measures when it wants to tackle macroeconomic issues such as inflation.
Looking ahead, we expect average inflation to remain below 1% and increase only moderately to 1.1% in 2015. Given this expectation, we do not expect the ECB to act on inflation again. However, if deflation becomes an issue, we think the ECB will act again and new rate cuts are a possibility. In our view, this includes smaller cuts in the refi rate than we have previously seen and it could be that the ECB will introduce a negative deposit rate. In a broad-based deflation scenario, the ECB would probably start to discuss using some form of quantitative easing.
From a market perspective, the narrowing of the spread between the refi and deposit rate implies that the ECB has effectively regained control over the money market curve. It will now be of much less concern if the amount of excess liquidity continues to decline, as the EONIA O/N will be capped by the refi rate. Thus, the likelihood of new LTROs seems to have declined.
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