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ECB Decision Time: What's Priced In?
09/12/2019 10:43 am EST
Here is a breakdown on the ECB decision later today on rates from Adam Button.
We have been getting questions about exactly what's priced in for the European Central Bank meeting today and it's not as straight-forward as it might seem. The euro dipped back to 1.1000 on Wednesday ahead of the decision and Eurozone bond yields ticked lower. Along with the ECB decision also comes a key US CPI report.
There are five main moving parts to the ECB decision and that's what makes it so tricky. Let's break them down one-by-one.
1) Deposit rate
The headlines from the decision will be what happened to deposit rate, which is currently at -0.40%. The consensus is a 0.10% cut to -0.50% but it's far from assured. The OIS market is pricing in 14 basis points of easing, which equates to a 40% chance of a 20 basis point cut.
2) Quantitative Easing
This is a major wild card. The consensus of economists is for a new €30 billion per month bond buying program. However, as series of speakers and sources report– including one last week from MNI – suggest that bond buys may be reserved in case of deeper economic problems. If that's the case, it might be signaled for October but the market reaction will depend on how clear that signal is.
3) Forward guidance
The current guidance from the ECB is to keep rates at or below current levels at least through the first half of 2020. The consensus is for something like through mid-2020 but policymakers may find it easy to push that even further, especially if QE is left out.
Eurozone banks are struggling and one of the reasons why is that negative deposit rates and a flat yield curve crush net-interest margin. Tiering (exempting banks with particular reserves from negative rates) could alleviate the problem but it could also complicate it, creating winners and losers among banks. On Wednesday, Dutch parliament passed a motion against tiering in a sign of how difficult it will be to find a consensus. Economists expect some help for banks here but it's a wild card.
5) Verbal guidance
Even with all the moving mechanical parts, the press conference may be what determines the market reaction. Both the market and the central bank are pivoting towards a reliance on fiscal policy for euro direction. ECB President Mario Draghi has emphasized this point since he started as President but we're fast approaching the time when the ECB is tapped out. Draghi may choose this moment to draw a line in the sand and say to governments with a more forceful tone that it's time to step up.
With all these considerations, handicapping the euro is difficult. Ultimately, we think right now that growth matters far more than the level of rates or miniscule changes in policy. The framework for viewing the decision may ultimately come down to how much confidence the central bank inspires that it can generate growth itself, or prod governments into doing more.
Adam Button is co-owner and managing director of ForexLive.com and a contributor at AshrafLaidi.com. You can see Ashraf’s daily analysis at www.AshrafLaidi.com and sign up for the Premium Insights. Ashraf's Tweet on indices here.
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