What can ECB do?
- Cut Depo Facility Rate (Interest on excess reserves-equivalent)
Depo rate is already at -20 bps currently and that means cutting will further bring rates into negative territory. Also a lot of talks have been that there are no demand for loads (Sept TLTRO take-up was weak). Cutting may or may not help. - Increase asset purchasing run rate from 60bn per month to ~70?
Pretty straightforward, some banks are also saying they may buy corp bonds, and judging that ECB recently increased the issue limit from 20% to 33% – This does suggest that they may be able to provide such flexibility. - Extend end date of QE, which is currently slated to run till Sep 2016
I believe market do expect this at the very least. QE doesn’t end in one round and many expect ECB not to reach its inflation target by Sept 2016 even in the most optimistic scenarios. Market expects more. I think purely extending will be a disappointment and EUR may rally instead.
Will they cut?
Short answer is no. Recent data such as business surveys/activities have been positive since the last meeting. CPI is negative but core is still holding up. Note that its views of outlook were based on assumptions in early august, before the market rout. This outlook is almost certain to deteriorate. But new numbers won’t be crunched until December – which is why many street banks are expecting ecb to ease further with these weak numbers on 3 Dec.
However, EURUSD has been peaking up (didn’t look at trade-weighted EUR) and its now near pre-QE levels in Jan’15. This is bad and may create downside for a dovish talk with Draghi trying to jawbone the EUR lower. But efforts in the past years have shown that this may or may not be effective and it would be interesting to look for price action.
Interestingly Dec meeting will still be before FOMC, which market is still refusing to price in rate hikes and this may complicate ECB assessments of economic outlook and QE effectiveness. But that will be a debate for another day…
Stay safe 🙂
P
PERRYNOMICS 