Divyang Shah, Senior IFR Strategist
Firstly, our central scenario is similar to the markets in looking for a 25bp cut in the refi rate, an unchanged deposit rate and a 50bps cut in the marginal lending rate - narrowing the corridor from 150bp to 100bp.
But the alternative scenarios are still of a significant risk. The ECB could decide to deliver a more aggressive 50bp cut to counter reservations over the effectiveness of cutting rates.
The other alternative is that the ECB could choose to leave rates unchanged, waiting instead for updated staff projections in June.
There is also the fact that the ECB has tended to not cut rates when the meeting is not held in Frankfurt. The May meeting will be held in Bratislava. A lack of consensus on measures for SMEs could be a further reason to delay a rate cut.
Even with a 25bp cut scenario the prospect that the ECB will opt to cut the marginal lending rate by 50bp is not a given. A 50bp cut in the marginal lending rate would leave the corridor narrower at 100bp but symmetrical around the refi rate.
The ECB could well decide that it does not want to lower the cost of emergency liquidity, or the ELA, by keeping the marginal lending rate at 1.50%. By leaving the marginal lending rate at 1.50% the ECB would keep the corridor at 150bps but this would be asymmetric.
Secondly, on SMEs there has been little in the way of a consistent message as to the preferences for board members. There is a consensus that something needs to be done with collateral rules changes seems to be market consensus. But it is likely that the ECB will look to take very little actual risk onto its books and instead:
1) allow collateral changes to be handled at the NCB level similar to what was seen with the acceptance of credit claims with the level of haircuts left to the NCBs to determine, and
2) see a focus on the European Investment Bank and European Investment Fund to underwrite and extend SME loans.
On the latter we have already seen Portugal team up with the EIB to help its SMEs.
The risk is that the ECB could simply deliver a promise to do something with the SMEs at the next meeting as it still needs time to either reach a consensus or work out the finer details of its plan.
Overall there are various alternative scenarios beyond the central scenario and thus the potential for much in the way of volatility around the announcement.
A likely rate cut will be announced at 11.45GMT while the SME related measures will come at the press conference that starts at 12.30GMT.
