Home' Trinidad and Tobago Guardian : December 3rd 2015 Contents Money markets are expecting a cut of at
least 10 basis points in the ECB s deposit
rate, while economists in a Reuters poll pre-
dicted the bond-buying will be increased
to 75 billion euros a month from 60 billion.
Beyond that, there is talk of extending
quantitative easing (QE) beyond the current
end date of September 2016, including
expanding from buying sovereign bonds to
municipal debt and even of non-performing
or "bad" loans.
A two-tier deposit rate system, which
Reuters revealed last week was one of the
options policymakers are considering, may
allow the ECB to cut even more aggressive-
ly.After pushing short-term debt yields to
record lows in the past week---with even
the five-year German bond yield falling
below the ECB s -0.20 per cent deposit
rate---investors are wondering whether
expectations have gone too far.
Since becoming ECB chief in 2011, Draghi
has sprung a series of surprises, first to
tackle the euro zone debt crisis and then to
head off the risk of deflation and revive
He launched long-term refinancing loans
to encourage banks to lend more into the
economy, set up the bond-buying safety
net after promising in a 2012 speech to do
"whatever it takes to preserve the euro," and
announced the current QE programme
would be worth one trillion euros.
But can he do it again?
"I m not sure the ECB will be able to sur-
prise us any more," said Natixis fixed income
strategist Cyril Regnat. He expects a 20 bil-
lion euro increase in monthly debt purchases,
a six-month extension of QE and a 10 basis
point deposit rate cut.
Euro zone yields were 1-3 basis points
higher on Monday.
German 10-year Bund yields were up 2
basis points at 0.47 per cent, off a one-
month low of 0.44 per cent hit on Friday.
Two-year yields were flat at minus 0.40
per cent, while five-year yields were slightly
higher at minus 0.185 per cent.
Expecting a lot
In money markets, euro zone overnight
Eonia interbank lending rates dated for the
ECB s meeting todays are trading at minus
0.28 bps, reflecting expectations of deposit
rates between minus 0.30 per cent and
minus 0.35 per cent.
Some analysts said a deposit rate of minus
0.35 per cent would be equivalent to -0.20/-
0.50 per cent rates in a system in which
half of the excess liquidity is charged at the
current rate and the other half is more heavily
"A lot has been priced into markets, which
begs the question as to whether the ECB
has stoked policy expectations too far?,"
said Rabobank senior fixed income strategist
Richard McGuire. He expects a 15 basis point
cut in the deposit rate, an extension of QE
into 2017 and a rise in monthly purchases
by 20 billion.
Even with so much priced in, the most
closely-watched gauge of the market s long-
term inflation expectations, the five-year,
five-year breakeven forward, remains at
around 1.75 per cent; below the ECB s target
of euro zone annual inflation below, but
close to two per cent.
Inflation is currently at just 0.1 per cent.
The gauge, which shows where markets
see 2025 inflation forecasts in 2020,
rebounded from about 1.56 per cent at the
end of September, after Draghi signalled the
ECB was mulling more measures to ease
policy. But it remains below this year s high
of about 1.86 per cent.
German consumer prices, harmonised to
compare with other European countries,
rose by 0.3 per cent on the year in November,
preliminary data showed on Monday.
German bonds with maturities of up to
seven years held negative yields and those
with maturities out to September 2020 trad-
ed below the current -0.20 per cent deposit
rate. That makes them ineligible for ECB
bond purchases under the current QE rules.
The ECB could avoid running out of
bonds to buy if it adds the debt of cities
and regions to the programme, one step
that it is believed to be considering. Such
a move would allow the ECB to extend QE
well into the second half of 2018, according
to private estimates.
"There is a sense that Draghi and col-
leagues are evaluating all options and this
should make for a very interesting meeting
on Thursday," said Mark Dowding, partner
and co-head of investment grade debt at
BlueBay Asset Management.
Regnat at Natixis said the ECB should
keep some firepower for later when it would
be able to assess the impact of an expected
interest rate increase by the US Federal
While yields on two-year German bonds
have fallen 10 bps in the past month, two-
year US Treasury yields have risen by a
similar amount, pushing the gap between
the two to its widest in nine years, at around
"If they decide to go all in this week
they will be out of ammunition ... if the
US outlook changes and the euro does not
weaken that much," Regnat said. Reuters
BUSINESS GUARDIAN www.guardian.co.tt DECEMBER 3 • 2015
While Mario Draghi has reg-
ularly surprised financial
markets, the European
Central Bank president will
struggle to pull off another
coup this week, so high are
investors expectations for new policy measures to
stimulate the euro zone economy.
Markets are variously pricing in an interest rate
cut, plus an increase in the size, scope and length
of the ECB s quantitative easing (QE) programme of
bond buying when its Governing Council meets on
Euro zone government bond yields crept higher
on Monday, with markets viewing bold easing meas-
ures as pretty much a done deal. The euro hit a 7-
1/2 month low at US$1.0563, having lost seven per
cent since the last ECB meeting on October 22 due
to expectations the US Federal Reserve will move in
the opposite direction; raising rates for the first time
in nearly a decade.
European shares rose on the prospect of more
stimulus as the ECB tries to nudge up inflation closer
to its target.
Euro zone markets set
high bar for ECB surprise
Links Archive December 2nd 2015 December 4th 2015 Navigation Previous Page Next Page