The ECB strongly signalled in its statement that a package of stimulus measures was on the way. It changed its forward guidance on policy rates as was widely expected to indicate that policy interest rates could go lower:
‘The Governing Council expects the key ECB interest rates to remain at their present or lower levels at least through the first half of 2020, and in any case for as long as necessary…’
Even more explicitly, it signalled that officials had been asked to do the homework necessary to put together a monetary stimulus package. It explained that:
‘the Governing Council has tasked the relevant Eurosystem Committees with examining options, including ways to reinforce its forward guidance on policy rates, mitigating measures, such as the design of a tiered system for reserve remuneration, and options for the size and composition of potential new net asset purchases’
We expect the ECB to cut its policy rates by 10bp in September followed by an additional reduction of 10bp in subsequent months. The ECB also looks likely to announce some form of deposit tiering system, given it is explicitly mentioned as a mitigating measure. We continue to think that the design of such a system will prove complicated.
In addition, we expect the ECB to announce a resumption of net asset purchases at the September meeting, with actual purchases starting in October. We previously expected an announcement in December, with purchases starting in January of next year. We continue to think the initial announcement will be for 9-months at EUR 70bn per month, for a total programme size of EUR 630bn. In our view, the programme could see relatively more purchases of national agency and regional bonds and corporate bonds. Within the public sector programme, the issue(r) limit for sovereigns could be left unchanged, though it could rise for national agency and regional bonds.
The ECB’s broader commentary on its inflation problem and its determination to address was stark. It ‘underlined the need for a highly accommodative stance of monetary policy for a prolonged period of time, as inflation rates, both realised and projected, have been persistently below levels that are in line with its aim’. In addition, it stressed ‘its commitment to symmetry in the inflation aim’. These comments suggest that net asset purchases could ultimately persist through 2020. (Nick Kounis & Aline Schuiling)