ECB YES or NO - Who knows and Who Cares.
1. The rate decision
No rate cut would be a major disappointment for markets. Most analysts expect the ECB to cut the deposit rate by 10 basis points to take it further into negative territory, to minus 0.4%. The refinancing rate is expected to stay at 0.05%.
2. Two-tiered deposit system and/or cheap loans
Negative interest rates means banks have to effectively pay to hold cash on their balance sheets, while at the same time making less money on their loans. To mitigate the effect from (probably) yanking rates further into negative territory, the ECB is expected to introduce a two-tier deposit facility. This means some of the excess liquidity banks would deposit at the ECB will be placed at a rate above the deposit rate.
“This reduces the costs to the banking sector of a lower deposit rate and hence opens the way for additional deposit rate cuts,” analysts at Danske Bank said in a note.
Another possibility is for the ECB to offer banks generous long-term loans, such as the long-term refinancing operation (LTRO) introduced in 2012 and the targeted LTROs launched in 2014.
3. Changes to QE
One of the big disappointments at the December policy meeting was the absence of an expansion of the €60 billion-a-month ($66 billion) asset-purchases program. This time around, analysts are again optimistic, speculating that the central bank will increase its QE purchases by €10 billion to €20 billion to take the monthly buys to as much as €80 billion.
Analysts at HSBC, however, said a QE expansion is unlikely this month, as the ECB still battles with technical constraints surrounding the program, such as simply finding enough bonds to buy.
4. New staff projections
The ECB will be in no shortage of reasons to act on Thursday. The updated staff projections are expected to be lowered significantly to reflect the weaker inflation and growth outlook that have resurfaced over the past months.
Holger Schmieding, chief economist at Berenberg, forecasts at least a 0.2 percentage point cut in 2016 growth projections to 1.5% and at least a 0.3 percentage point cut in 2016 inflation forecasts to 0.7%.
The ECB has an inflation target of close to, but below, 2%
5. Once bitten, twice shy - will meeting be another disappointment?
The ECB destroyed a hoped-for Santa rally in stock markets in December, when its rate cut and QE extension massively disappointed investors.
With traders again seeming to bank on a substantial round of easing measures, several analysts have warned that we could see a repeat of the December carnage.
“Although we do believe that a larger cut or a drastic change in the QE-package is possible, we have to bear in mind that this week’s policy easing package is unlikely to be the last one and that the ECB will need to keep some measures on the back burner,” analysts at Rabobank said in a note.
“This is especially so considering that the effect of all these policy measures is limited at best,” said Rabobank.
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