Policy Announcement: Thurs March 12th, 12:45 GMT / 08:45 ET;  Press Conf: 13:30 GMT / 09:30 ET Current Rates: Deposit -0.50%, Main Refinancing 0.00%, Marginal Lending Facility 0.25%. In Brief:
  • Expectations for the ECB to react to coronavirus with looser monetary policy
  • Analysts see the potential for one or more of the following:
    • 10bp Depo rate cut, potentially combined an increase of the tiering multiple
    • Increase QE rate of purchases by €20bn to €40bn p/m
    • Changes to TLTROs to enhance banks incentive to lend to small and medium enterprises
  • March is Lagarde’s first meeting where the ECB is expected to deliver a policy change
  • Market is pricing a 100% probability of a 10bp cut with another 10bp cut in April
  • Expectations of policy action heightened further after the BoE’s cut on Weds morning
  • New staff forecasts will be published but outdated already due to recent coronavirus propagation
Overview: Although expectations at the beginning of the year were that the ECB would likely leave monetary policy unchanged at least until 2021, the projected impact of coronavirus on the European economy has resulted in market participants now expecting the ECB to deliver something at the March meeting. The debate is over what the ECB can and will deliver. Most market participants agree that the ECB has only limited policy space. Interest rate cuts could be on the table although with the present deposit rate at -0.50%, any cut would reduce bank profitability. Some believe a cut would need to be combined with an increase in the tiering multiple thereby reducing the potential negative impact on banks. Another potential move could be to increase the monthly QE purchases from the present level of €20bn a month to €40bn a month. Finally some believe the ECB could look to improve the attractiveness of the TLTROs to provide a greater incentive for lending to small and medium companies or even launch a totally new TLTRO program. Although Christine Lagarde has been at the helm of the ECB for more than four months, the meeting this week represents the first meeting where the ECB is expected to deliver a policy change. When Mario Draghi was in charge, his approach for the ECB was usually to deliver an extensive package and then spend the next few meetings simply highlighting that the previous measures needed time to filter into the economy. This meeting should provide us insight into her future approach to monetary policy.
  • If ECB does not loosen policy at this meeting, Lagarde will likely be characterized as a ‘hawk’ and some may even conclude that the ECB feels they have reached their perceived limit at what can be achieved by monetary policy. This would likely result in a significant appreciation of the EUR currency. Confirmation that the ECB no longer considers monetary policy loosening as a viable option would be for Lagarde to outright state that fiscal policy is the only option at this time.
  • If the ECB provides some easing by implementing only one measure (a 10bp Depo rate cut or a slight increase in the pace of QE or a tweak to the TLTRO III programs) then market participants will likely perceive this as a confirmation that Lagarde’s ECB will be one that provides a drip feed approach to stimulus.
  • If the ECB provides monetary easing across the board with a rate cut, an increase in QE and TLTRO enhancements, Lagarde’s reputation as a ‘dove’ will be cemented.
On potential TLTRO enhancement, the present TLTRO III program provides 3y liquidity to banks against ECB eligible collateral. The present limit for SMEs loans portfolio as of the end of February 2019 was 30% of loans. One method to enhance TLTRO would therefore be to increase the SMEs limit from 30% to 50% of the portfolio. Another step to enhance TLTRO borrowing would be to include credit line facilities for SMEs. A third method could be to compensate banks for the increase in the ‘regulatory cost’ associated with the increase in loans to SMEs. The March meeting will also see an update of the staff projections. As highlighted by ING, these projections had to be submitted to the ECB some 2 weeks ago which is before the large increase in European Coronavirus cases and the subsequent strong sell-off in Equities. The large measures announced by authorities to stop the spread of the disease such as quarantine of regions will therefore not be included in the forecasts. Their release of the new data is therefore irrelevant as it is already dated. With the coronavirus propagating through Europe at this time, there is almost no mention in bank research about recently released economic data apart from the mention that Q4 2020 was weak. The focus is instead on risk of a significant reduction in the pace of economic growth due to both supply and demand side shocks and the potential for both a recession and risk of a deflationary environment developing. Tiering Multiplier: With the potential of an increase in the pace of QE at this meeting and/or a cut in the Depo rate, many believe the ECB may need to bring forward their discussion on the tiering multiplier. As QE purchases continue, banks who acquire excess liquidity on their balance sheet get penalized as this liquidity is funded at a rate of -0.50%. Cutting rates further to -0.60% or increasing the QE purchase rate could have a negative impact on bank profitability which could turn to tightening of financial conditions unless the tiering multiplier is increased. Strategy Review: Although there is an ongoing process of having a strategy review of policy at the ECB, the process is expected to be only completed by the end of this year. Few details are therefore likely to be presented regarding the Strategy review at this meeting.. Highlights from ECB Policy Statement, Lagarde’s January Introductory Statement and Q&A: Interest Rates & forward guidance: “[key interest rates] will remain unchanged at 0.00%, 0.25% and -0.50% respectively. The Governing Council expects the key ECB interest rates to remain at their present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2% within its projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics.”. QE (Asset Purchase Program or APP): “will continue to make net purchases under its asset purchase programme (APP) at a monthly pace of €20 billion. The Governing Council expects them to run for as long as necessary to reinforce the accommodative impact of its policy rates, and to end shortly before it starts raising the key ECB interest rates.” Lagarde statement comment on economic outlook: “ incoming data since our last meeting are in line with our baseline scenario of ongoing, but moderate, growth of the euro area economy. In particular, the weakness in the manufacturing sector remains a drag on euro area growth momentum. However, ongoing, albeit decelerating, employment growth and increasing wages continue to support the resilience of the euro area economy. While inflation developments remain subdued overall, there are some signs of a moderate increase in underlying inflation in line with expectations.” On growth outlook risks: “risks surrounding the euro area growth outlook, related to geopolitical factors, rising protectionism and vulnerabilities in emerging markets, remain tilted to the downside, but have become less pronounced as some of the uncertainty surrounding international trade is receding.”