| Videos | Channels | Search |
What action can the ECB take?
Saxo Bank head of Macro Strategy, Mads Koefoed, is ruling out a rate cut from the ECB when it meets this week. So what does he think they will come up with? Mads Koefoed explains the options facing the ECB:
Inflation remains sticky well below the European Central Bank's 2 percent target and I expect that to result in action at the March meeting. Action, I expect, will be in the form of a removal of sterilisation of the SMP, however, not in the shape of a rate cut.
No rate hike coming...: The recovery, though sluggish, is well underway in the euro area with the economy printing three straight quarters of growth through Q4 and well on track to add to that this quarter. However, inflation and lending both remain subdued with the former at 0.8 percent year-on-year in February. That was unchanged from January, but above the consensus expectation of a decline to 0.7 percent, and while ECB president Mario Draghi acknowledged the low level of inflation in a recent speech, the president also stressed that inflation expectations still remain well-anchored*. An interesting twist at the March meeting is that the ECB staff economists will present their first 2016 forecasts. This may sway the ECB to cut the already record-low main refinancing rate, which is currently 0.25 percent, should the forecasts for inflation prove to be lower than expected. On balance, however, I expect not only the inflation forecasts to be relatively uneventful, but also for the main refinancing rate to stay at 0.25 percent. The deposit and lending rates too should stay at present levels (0 and 0.75 percent).
... but sterilisation of SMP is: In May 2010 with the sovereign debt crisis raging and Greece about to be bailed out for the first time, the ECB initiated the Securities Markets Programme (SMP). Not only was the SMP a temporary measure — and eventually replaced by the Outright Monetary Transactions programme (OMT) — it was also to be fully sterilised, meaning that liquidity is withdrawn from other areas of the eurosystem to ensure that neutrality of the SMP. The Bundesbank is now onboard with regards to termination of SMP sterilisation, and Ewald Nowotny, member of the ECB governing council and governor of the Austrian central bank noted that "...stopping the sterilisation of the SMP purchases would be a rather obvious choice". The improving economy and lack of a further leg down in inflation may deter the ECB from even more unconventional measures at this point, and the removal of sterilisation hence looks like a good compromise, which will not rock the boat but at the same time demonstrates that the ECB is 'doing something'.
The improving economic fundamentals, the unchanged level of (dis-)inflation and the need to signal determination will, I expect, see the March meeting of the ECB governing council result in an end to SMP sterilisation, but not a rate cut or outright quantitative easing. Not all those surveyed by Bloomberg are in agreement with me about the 'no rate cut' position. In fact, eight out of 54 expect a lowering of the main refinancing rate to 0.1 percent — including Citigroup, Morgan Stanley, and Wells Fargo — while a further six expect a cut to 0.15 percent. The rest look for 0.25 percent. We shall see, the ECB has surprised with a rate cut before.
* Specifically, the ECB president stated: "Right now we have a level of inflation which is way below 2 percent... We know that the longer it stays at the current level, the higher will be the risk that it will not go back to 2 percent in any reasonable time - in other words, the longer will be the risk that inflation expectations could actually be disanchored, and we don't want that."
Mads Koefoed is head of macro strategy at Saxo Bank. Read more of Mad's commentary on our online social trading platform
01:46 minutes
Tags: bundesbank, central bank, central bank decision, central bank meetings, central bank policy, central bank rates, central banks, central markets, ecb, ecb action, ecb balance sheet, ecb council, ecb draghi, ecb euro, ecb inflation target, ecb mandate, ecb meeting, ecb news, ecb policy, ecb rate, ecb rate cut, ecb rate decision, ecb rate decision interest rates, ecb rates, ecb rates decision, euro, euro area, euro crisis, euro dollar, euro zone, europe, europe gdp, europe growth, european central bank, european economy, european recovery, eurozone, eurozone crisis, forex trading, fx, fx crosses, fx forex, fx market, fx markets, fx options, fx strategy, fx trade, fx trading, germany economy, inflation, inflation rate, inflation rates, inflation report, inflation target, targets, trade idea, trading fx, trading idea, trading risks, tradingfloor.com