28 Jun 2014
ECB successful with its message to markets?– Rabobank
FXStreet (Guatemala) - Analyst at Rabobank explained with its June rate decision, the ECB has brought its key repo rate to the lowest, practically feasible, level.
Key Quotes:
“To acknowledge this, its forward guidance language now reads “the key ECB interest rates will remain at present levels for an extended period of time in view of the current outlook for inflation.” Compared to the previous guidance, the possibility of a further cut has been removed”.
“However, the ECB has been keen to stress that the conventional measures, which accompanied the rate cuts, imply that its message of forward guidance has been further strengthened”.
“The extension of the full allotment procedure until at least end-2016 and the introduction of fixed rate TLTROs (which potentially may extend to end-2018 if banks meet certain criteria) are the ECB’s main exhibits to support this claim”.
“So, has the ECB been successful in getting its message across? It would certainly appear so”.
“First of all, market expectations of future interest rates have dropped markedly since May, when Draghi hinted at “action in June” and even further since the actual announcements in June”.
“This is illustrated in figure 1. Secondly, the variance in future rate expectations by analysts has dropped almost to zero1, which is illustrated in figure 2 where we have used results from Reuters ECB polls since October last year. There is very little doubt among market participants that the ECB will keep its refi rate at 15bp until, at least, 2015Q4”.
Key Quotes:
“To acknowledge this, its forward guidance language now reads “the key ECB interest rates will remain at present levels for an extended period of time in view of the current outlook for inflation.” Compared to the previous guidance, the possibility of a further cut has been removed”.
“However, the ECB has been keen to stress that the conventional measures, which accompanied the rate cuts, imply that its message of forward guidance has been further strengthened”.
“The extension of the full allotment procedure until at least end-2016 and the introduction of fixed rate TLTROs (which potentially may extend to end-2018 if banks meet certain criteria) are the ECB’s main exhibits to support this claim”.
“So, has the ECB been successful in getting its message across? It would certainly appear so”.
“First of all, market expectations of future interest rates have dropped markedly since May, when Draghi hinted at “action in June” and even further since the actual announcements in June”.
“This is illustrated in figure 1. Secondly, the variance in future rate expectations by analysts has dropped almost to zero1, which is illustrated in figure 2 where we have used results from Reuters ECB polls since October last year. There is very little doubt among market participants that the ECB will keep its refi rate at 15bp until, at least, 2015Q4”.