ECB sticks to the plan in July, signals September stimulus bang
The European Central Bank (ECB) decided to leave its main interest rates unchanged at its 25 July meeting, but tweaked its forward guidance suggesting that it will unveil a broad package of monetary stimulus at its September meeting. Accordingly, rates continue to sit at record-low levels: The refinancing rate sits at 0.00%; the marginal lending rate at 0.25%; and deposit facility rate at minus 0.40%.
Soft economic data, persistently low inflation, modest inflation expectations and ample downside risks to the outlook have put pressure on the ECB to unleash stimulus to shore up the outlook. That said, the Bank held fire in July, using instead forward guidance to soften conditions and likely giving itself time to put together its action plan. In addition, the ECB will have updated economic forecasts by the next monetary policy decision in September. With the refinancing rate already sitting at zero and ultra-accommodative monetary policy in place, the ECB’s toolbox to spark conditions is relatively thin.
The ECB made several notably changes to its forward guidance, hinting at what could be revealed in September. Most significantly, in the accompanying press conference, ECB President Mario Draghi mentioned the possibility of a rate cut, stating that interest rates are expected to “remain at their present or lower levels through at least through the first half of 2020.” Previously, the Bank had only referred to rates remaining at current levels. Moreover, Draghi emphasized that “the Governing Council is determined to act” if inflation continues to linger below target and that it “stands ready to adjust all of its instruments”, hinting that a broad-based package could be unveiled, likely with both conventional and unconventional monetary tools deployed.
Commenting on Nomura’s view in the aftermath of the meeting, the research team states:
“We expect the ECB to deliver a package of measures in September – lower rates (10bp depo rate cut), another adjustment to guidance (replacing specific calendar guidance with “extended period”), a tiered reserve rate system and a restart of the asset purchase scheme (across all elements, including PSPP). To add to that the ECB sounded keen to encourage those countries with fiscal room to make use of it, arguing that it could improve the efficacy of monetary policy. Should Germany respond to this clarion call then policy generally could become highly supportive this autumn.”
Summarizing ING’s view, Carsten Brzeksi, chief economist ING Germany noted:
“In our view, it is hard to see how the ECB could once again step up its dovishness by words, rather than action. Admittedly, it does not yet look as if there is a consensus view of what to do at the ECB. However, in our view, the likelihood of a package of several measures at the September meeting, rather than a series of smaller measures, has clearly increased. Think of a 20bp cut of the deposit rate, a tiering system, a lowering of the TLTRO pricing and a restart of QE by 20-30bn euro per month.”