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Daily Insight

22 March 2016

Further ECB easing

The ECB is not done yet

We continue to think that the ECB will ease monetary policy further in the coming months.

Admittedly the central bank announced a broad-based and significant package of measures

earlier this month. However, it may not be enough to get inflation sustainably all the way back

to the goal over the next few years. According to the ECB’s own forecasts, inflation will be

only 1.6% even at the very end of 2018. It is hoping the March package closes the gap, but

the euro has strengthened since and generating significant domestic inflationary pressures is

a very slow process. Wage growth and core inflation remain weak and economic growth has

lost momentum.

Focus shifting to QE rather than rate cuts

We had expected big things from the ECB in March (including QE, rate cuts and new long-

term favourable loans for banks) given the extent of the deterioration of the inflation outlook

and it did deliver. However, we thought the Governing Council would cut the deposit rate more

significantly than it did and leave the door open for more rate reductions. Instead, the ECB cut

the deposit rate relatively modestly and seemed to rule out further aggressive cuts, saying it

would rely on other instruments. We therefore no longer expect any further deposit rate cuts,

meaning we see the current rate of -0.4% as the bottom. We previously expected a low of

-0.7%.

A euro surge could still trigger another rate cut but not our base case

Although we do not completely rule out further rate reductions, we think a sharp further rise in

the euro would be needed to trigger this. Such a scenario could occur due to Brexit (which

would lead to a sterling slump) or due to additional dovish shifts in expectations about the Fed

or BoJ.

Group Economics Macro & Financial Markets Research

Nick Kounis

Head Macro & Financial Markets

Research

Tel: +31 20 343 5616

nick.kounis@nl.abnamro.com

We think further ECB monetary easing is on the cards …

… given weak growth and the prospect for inflation undershooting the goal

Further ECB stimulus will likely take the shape of more QE

Meanwhile, eurozone consumer confidence fell further in March

2 Daily Insight – Further ECB easing - 22 March 2016

Increase and extension of QE

Rather than rate cuts, we think further monetary easing will take the form of additional QE. We

expect an increase in the monthly purchase total by another EUR 20bn taking it to EUR

100bn. In addition, we expect the end date to be extended to June 2017, from March 2017

currently. This will probably not be announced before September, given the ECB may want to

first implement and see some early results from the measures it announced in March.

Eurozone consumer confidence drops again

Meanwhile, turning to economic data, the European Commission’s consumer sentiment

indicator fell further in March. It dropped to -9.7 from -8.8 in February, marking the third

consecutive monthly drop. The indicator is still at decent levels, but the recent decline does

point to only moderate consumer spending growth (see chart). For much of last year,

consumer spending had been the main pillar of the lackluster economic recovery.

Eurozone consumer confidence and spending

% qoq Balance

Source: Thomson Reuters Datastream, ABN AMRO Group Economics

-35

-30

-25

-20

-15

-10

-5

0

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

08 09 10 11 12 13 14 15 16

Private consumption (lhs) Consumer sentiment (rhs)

3 Daily Insight – Further ECB easing - 22 March 2016

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

Monday 21/03/2016 08:45:00 EC ECB's Coeure speaks in ParisMonday 21/03/2016 09:15:00 US Fed's Lacker speaks in ParisMonday 21/03/2016 10:30:00 EC ECB's Constancio speaks in LondonMonday 21/03/2016 15:00:00 US Existing home sales - % mom Feb -7 -2 -1.0Monday 21/03/2016 17:40:00 US Fed's Lockhart speaks on US economy Feb -2 -1.0

Tuesday 22/03/2016 10:00:00 DE Ifo - business climate - index Mar 105.7 105.9 106.1Tuesday 22/03/2016 10:30:00 GB CPI - % yoy Feb 0.3 0.3Tuesday 22/03/2016 11:00:00 DE ZEW index (expectation economic growth) Mar 1.0 5.2 10.0Tuesday 22/03/2016 14:00:00 US FHFA house price index - % mom Jan 0.4 0.5 0.5Tuesday 22/03/2016 14:00:00 HU Base rate -% Mar 22 1.35 1.35 1.35Tuesday 22/03/2016 18:30:00 US Fed's Evans speaks in Chicago

Wednesday 23/03/2016 EC ECB's Weidmann speaks in LiechtensteinWednesday 23/03/2016 US New homes sold - % mom Feb -9.2 2.1 3.0Wednesday 23/03/2016 00:00:00 US Fed's Harker speaks in New York

Thursday 24/03/2016 10:00:00 EC PMI manufacturing - index Mar P 51.2 51.4 51.2Thursday 24/03/2016 10:00:00 EC PMI services - index Mar P 53.3 53.5 53.2Thursday 24/03/2016 10:00:00 EC Composite PMI output Mar P 53.0 53.2 53.0Thursday 24/03/2016 10:30:00 GB Retail sales - % mom Feb 2 -1Thursday 24/03/2016 13:00:00 TR Repo rate - % Mar 24 7.5 7.5 7.5Thursday 24/03/2016 13:15:00 US Fed's Bullard speaks in New YorkThursday 24/03/2016 13:30:00 US New durable goods orders - % mom Feb P 4.7 -2.0Thursday 24/03/2016 14:45:00 US Markit - Flash PMI Mar P 51.3

Friday 25/03/2016 00:30:00 JP CPI - % yoy Feb 0.0 0.3Friday 25/03/2016 13:30:00 US GDP - % qoq annualised 4Q T 1.0 1.0 1.0

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