ECB's first move towards stimulus to come at July meeting – ABN AMRO

Analysts at ABN AMRO are expecting the ECB to cut its policy rates, adding to the monetary stimulus already factored into their base case in the form of a re-start of QE.

• “We expect a 10bp cut in all of the ECB’s main policy rates in September of this year, and a second 10bp reduction in Q1 of next year. This would take the ECB’s deposit rate down to a low of -0.6% and the refi rate into negative territory for the first time. We see the ECB’s deposit rate as being the key policy rate as it anchors interbank rates in an environment of excess liquidity.
• The Governing Council has communicated that it will ‘continue to monitor carefully the bank-based transmission channel of monetary policy and the case for mitigating measures’. The reduction in the deposit rate, as well as the refi rate, will directly reduce the cost from commercial banks borrowing from the ECB in TLTRO-III, as well as increasing the cost for banks of keeping excess reserves at the ECB.
• At the June press conference, ECB President Draghi was explicit in asserting that the ECB was willing to cut policy rates as well as re-starting QE and strengthening forward guidance. At the ECB Forum in Sintra, Mr Draghi emphasized that a package of measures had positive re-enforcing effects in 2014-2015, and we think it may go for the same approach this time around.
• We think the ECB’s first move towards stimulus will come at the July meeting. At that meeting, we think the Governing Council will decide to change its forward guidance on policy rates to explicitly hint at the possibility of rate cuts.
• By December, we expect the ECB to announce a EUR 630bn QE package, to be implemented for 9-months from January 2020 at a pace of EUR 70bn per month. The second 10bp rate reduction will follow in Q1 of next year.”