ECB Watch

2 min read
Divyang Shah

Lower-than-expected inflation data released this morning and a sharp fall in excess liquidity, coupled with the bearish ECB talk this week have put potential easing at next week’s ECB meeting into play.

The fact that we have been through this script before at both the February and March ECB meetings will, however, make the market cautious about forecasting action from the ECB.

Eurozone flash HICP is not due for release until Monday but the weaker-than-expected readings on Spanish and German state inflation releases this morning create a downside risk that could help pry open the ECB’s toolbox.

On top of the lower-than-expected inflation we also have excess liquidity at a cycle low of €104bn and is very close to breaking the psychological €100bn mark. A fall below €100bn on excess liquidity would lead to a further effective tightening of monetary policy as the O/N EONIA rate trades close to the refi rate as opposed to the deposit rate floor.

The usual set of potential measures are back on the table again in the form of:

1) leaving the SMP unsterilised either partially or fully

2) a cut in the deposit and refi rates by 10bp–15bp

3) a further strengthening of forward guidance and

4) signals that work is in progress regarding quantitative/credit easing that involves ABS.

The flattening of the EONIA curve and the lower EUR/USD highlight that expectations are starting to be priced for action.

The risk for the ECB is that if they don’t act now they will risk a violent reversal of the favourable moves on EUR/USD and money market rates. At 2 ticks the 99.987 calls on September Euribor could prove attractive risk/reward to play for ECB action next week.

ECB HQ