ecb watch 10 march 2016

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ECB Watch

10 March 2016

ECB delivers broad stimulus but may need to do more

The ECB’s March package

The ECB announced a stimulus package on Thursday in response to the significant

deterioration in the growth and inflation outlook. There were three broad sets of measures:

Rate cuts: It cut its deposit rate by 10bp to -0.4% and its refi and marginal lending rates by

5bp to 0% and 0.25% respectively.

QE: It increased its monthly purchases by EUR 20 bn taking them to EUR 80bn starting in

April and expanded the eligible universe to include investment grade bonds of non-financial

corporates established in the eurozone. This will be done under a new corporate sector

purchase programme (CSPP), which will be launched towards the end of Q2. It also increased

the purchase limit for supranational bonds to 50% from 33% of the universe.

Bank funding: It introduced four new TLTROs (TLTRO II) each maturing in 4 years to be

conducted from June 2016 to March 2017. Banks will be able to borrow 30% of their eligible

loans (to non-financial corporations and households excluding mortgage loans) as of 31

January 2016 less the amount outstanding in TLTRO I. We estimate the total potential take-

up at around EUR 1.25 trillion, but it will probably be less than that. Banks will be able to

borrow the funds in principle at the refi rate. However, the rate on these loans could be as low

as the deposit rate of -0.4% depending on the degree to which banks step up lending to the

private sector. Banks will also be able to roll the old TLTROs into the new scheme to benefit

from the lower cost.

Group EconomicsMacro & Financial MarketsResearch

Nick Kounis

Head Macro & Financial Markets

Research

Tel: +31 20 343 5616

[email protected]

Aline Schuiling

Senior Economist

Tel: +31 20 343 5606

[email protected]

Hyung-Ja de Zeeuw

Senior Credit Strategist

Tel: +31 20 628 3551

[email protected]

• ECB delivered a broad package of rate cuts, increased QE including

corporate bonds and new cheaper TLTROs for banks

• However, the positive market impulse faded as President Draghi cast doubt

on further rate cuts and the adoption of tiered rate system

• Inflation is still seen undershooting the ECB’s goal in 2018 and it will also

struggle to meet its new increased QE targets

• We think the ECB may well need to do more in the coming months

2 ECB Watch - ECB delivers broad stimulus but may need to do more - 10 March 2016

Forward guidance: Apart from the above measures the ECB also repeated that ‘the

Governing Council expects the key ECB interest rates to remain at present or lower levels for

an extended period of time, and well past the horizon of our net asset purchases’. This means

beyond March 2017. However, during the press conference President Draghi signalled that

the ECB did not currently think it would need to cut rates further and suggested that the onus

of future stimulus would be on other measures. He also seemed to rule out a tiered deposit

rate system saying it was too complex.

ECB projections revised drastically lower

In its new Staff Macroeconomic Projections, the ECB has revised its forecasts for economic

growth and inflation lower again. Eurozone GDP is expected to grow by 1.4% this year

(revised lower from 1.7% in its December 2015 forecasts), by 1.7% in 2017 (was 1.9%) and

by 1.8% in 2018. According to Mr Draghi the risks to the growth outlook remain tilted to the

downside.

Inflation still below goal in 2018

According to the ECB’s own forecasts the central bank will continue to miss its inflation target

in the coming years. The forecast for inflation in 2016 was revised lower to 0.1% from 1.0%,

and that for 2017 to 1.3% from 1.6%. The first estimate for inflation in 2018 is 1.6%, which is

still below the ECB’s own target for price stability. The downward revision of the inflation

forecast is mainly due changes in the projected oil price and trade-weighted euro exchange

rate. The ECB has lowered its projections for oil prices (Brent) by USD/barrel 17 this year (to

around 35) and by USD/barrel 16 in 2017 (to around 41). In 2018 it expects oil prices to be

around EUR/barrel 45. The ECB now expects an appreciation of the trade-weighted euro by

almost 5% this year (was stable) to be followed by stabilization in 2017 and 2018. With regard

to these assumptions, it seems the central bank has erred on the side of caution. This raises

the probability that it will not have to revise its inflation forecasts lower yet again in the near

future.

ECB’s forecasts for GDP growth ECB forecasts for inflation

% %

Source: ECB Source: ECB

The ECB may well need to do more

The ECB’s March package represents a significant set of measures that will lead to an easing

of financial conditions. However, the ECB may well need to follow-up with fresh measures in

1.71.8

1.71.9

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2016 2017 2018

September 2015 December 2015 March 2016

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2016 2017 2018

September 2015 December 2015 March 2016


the coming months given the sharp deterioration of the growth and inflation outlook. In

particular the ECB is still projecting an undershoot of the inflation goal in 2018 on average. In

addition, the euro – one of the key transmission mechanisms of its policy – ended the day

higher rather than lower.

The TLTRO at a negative rate, the step up of QE purchases and the addition of corporate

bonds are more significant moves than expected. The TLTRO is a major positive for bank

funding costs as it looks to be much more attractive than current TLTROs as well as

comparable market sources of funding, such as covered bonds. As such it will help to cushion

the blow from negative rates. However, the deposit rate cut is less than expected, while the

absence of a tiered system and the signal that further rate cuts are less likely are also

disappointing.

Further changes to the QE programme may be necessary

The ECB may also need to take further steps to increase the eligible universe of assets given

it will struggle to meet its new EUR 80bn per month target for German securities under the

capital key. Even under the existing target of EUR 60bn the programme would struggle to

reach the target for German securities, as it would come up against the 33% issuer limit for

the stock it owns even including regional bonds (see chart below). Adding corporate bonds to

the eligible universe helps but the market is illiquid and the ECB may not manage to buy

sufficient quantities of German bonds to solve the problem.

ECB’s previous QE plan already hitting limits Corporate bonds outstanding

Purchases relative to eligible universe, % EUR bn

Source: Bloomberg, ECB, ABN AMRO Group Economics Source: Markit, ABN AMRO Group Economics

Market impact positive at first but then fades

After the announcement of the ECB’s policy package, 10y government bond yields fell and

curves flattened reflecting a mixture of a smaller deposit rate cut and more QE. We also saw a

rally in risky assets, with corporates and periphery government bonds outperforming.

However, the moves partly reversed after a strong initial rally. Indeed, the euro rebounded to

finish higher after a sharp fall initially. This reflects that the positive surprise from the

announcement of the measures was undone by President Draghi’s more hawkish forward

guidance on interest rates. The market verdict initially was clearly that Mario had delivered but

by the end of the Press Conference investors were less positive, as doubts returned on the

willingness of the ECB to do more.

0

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FR IT NL

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QE Plus without regional bonds QE Plus with regional bonds

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50

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FR DE IT ES NL BE AT IE PT FI LU SK

Non-financials by country of issuer


Good news for credits

This announcement is clearly a positive for credit spreads and risky assets in general. The last

time Non-financials were added to the list, spreads tightened by 10 to 15 bps after the

announcement. The poor liquidity in the Non-financials secondary market will amplify the

spread tightening further. However, new issuance will probably get a boost from today’s

announcements and this should alleviate the drought in the primary market somewhat. We

expect that the positive sentiment and the lower yields will attract more issuers, also from

overseas, to the EU IG market. This could bring some alleviation, but it will also mute the rally.


Find out more about Group Economics at: https://insights.abnamro.nl/en/

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Day Date Time Country Key Economic Indicators and Events Period Latest outcome Consensus ABN AMRO

Monday 07/03/2016 08:00:00 DE Manufacturing orders - % mom Jan -0.7 -0.2 0.0Monday 07/03/2016 09:00:00 CH Foreign currency reserves - CHF mln Feb 574964Monday 07/03/2016 21:00:00 US Fed Reserve consumer credit - USD bn Jan 21.3 15.3

Tuesday 08/03/2016 00:50:00 JP GDP - % qoq 4Q F -0.4 -0.4Tuesday 08/03/2016 08:00:00 DE Industrial production - % mom Jan -1.2 1.4Tuesday 08/03/2016 11:00:00 EC GDP - % qoq 4Q P 0.3 0.3 0.3Tuesday 08/03/2016 12:00:00 US NFIB small business optimismem - index Feb 93.9 94.2 94.0Tuesday 08/03/2016 CN Exports - % yoy Feb -11.2 -14.5Tuesday 08/03/2016 CN Imports - % yoy Feb -18.8 -10.1

Wednesday 09/03/2016 16:00:00 CA Policy rate - % Mar 9 0.5 0.5 0.5Wednesday 09/03/2016 NZ Policy rate - % Mar 10 2.5 2.5 2.5

Thursday 10/03/2016 02:30:00 CN CPI - % yoy Feb 1.8 1.9Thursday 10/03/2016 02:30:00 CN PPI - % yoy Feb -5.3 -4.9Thursday 10/03/2016 06:30:00 NL CPI - % yoy Feb 0.6 0.6Thursday 10/03/2016 13:45:00 EC ECB Deposit rate - % Mar 10 -0.3 -0.4 -0.5Thursday 10/03/2016 13:45:00 EC ECB Refi Rate - % Mar 10 0.05 0.05 0.05Thursday 10/03/2017 14:30:00 EC ECB Press ConferenceThursday 10/03/2016 14:30:00 US Initial jobless claims 278.0 275.0Thursday 10/03/2016 15/03/2016 CN M2 money growth - % yoy Feb 14.0 13.7Thursday 10/03/2016 15/03/2016 CN New loans - CNY bn Feb 2510 1200Thursday 10/03/2016 15/03/2016 CN Aggregate financing - CNY bn Feb 3417 1780Thursday 10/03/2016 KR Policy rate - % Mar 10 1.5 1.5 1.5

Friday 11/03/2016 08:00:00 DE CPI - % yoy Feb F 0.0Friday 11/03/2016 10:30:00 GB Trade balance - GDP mln Jan -2709Friday 11/03/2016 PL Reference rate - % Mar 11 1.5 1.5

Source: Bloomberg, Reuters, ABN AMRO Group Economics (we provide own forecasts only for selected key variables and events)

ecb watch 10 march 2016

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