Friday, 21 September 2018

UPDATE - IFR Comment: The ECB's 25bp cut, symmetrical corridor

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The ECB announcement came in largely as expected with a 25bp cut in the refi rate, deposit rate staying at zero and the marginal lending rate cut by 50bp.

Divyang Shah

Divyang Shah, Senior IFR Strategist

(Updates after ECB news conference)

The latter leaves the corridor symmetrical but is now lower at 100bp compared to 150bp previously.

The largely expected move is seeing only a modest reaction from the market with as the ECB has not been more aggressive as had been feared by some.

Forward guidance on liquidity, consultation on SME

In addition to rate cut the ECB also took decisions with regard to ways to enhance credit and liquidity decisions.

On the liquidity side of the equation the ECB reiterates existing operations, but the key is highlighting that not only will they stay for as long as possible, but they even provide us with a date of 8 July 2014 and end-Q2. The forward guidance is not new news but there is slightly more flesh on the bone.

The bigger disappointment is likely to come on the SME measures with the ECB simply promising something at a future date. But there are no changes to collateral rules but simply consultations with European institutions (EIB/EIF?) on ABS collateralised by SME loans.

There are no new non-standard measures, just consultations, so on this score the ECB has not met expectations.

The ECB meeting today has delivered as expected on standard measures. 

But given the ECB’s view that it’s not the price of liquidity but its lack of distribution that matters it is disappointing the ECB failed to come up with measures for SMEs.

Draghi fuels negative depo expectations?

Unlike back in December the latest comments with regards to a negative deposit rate are not having as significant an impact.

Back then we saw ECB date OIS pricing in a strong chance that the deposit rate would go negative, this time the ECB meeting OIS curve is negatively sloped, but still positive between 3/7bps for the remainder of the year. Although some movement toward the risks of a negative deposit rate can be seen by looking at the 1y1y OIS which has gone to trade around 10/11bps from 15/16bps.

But the mention of a negative deposit rate has been enough to weigh on the EUR which is below 1.31 against the USD as well as allowing Jun bunds to trade above 147. The price action on FX and bund futures suggests that it was more position/stop related as opposed to any real conviction over a deposit rate cut.

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