Euro area monetary policy – “Sintrapped”

Although the final decision will depend on US-China trade negotiations, the Fed and economic data, the ECB is likely to deliver a comprehensive easing package in September.

In Sintra, Mario Draghi signalled the ECB’s unequivocal readiness for further stimulus “in the absence of improvement”. Although the final decision will depend on US-China trade negotiations, the Fed and economic data, the ECB is likely to deliver a comprehensive easing package in September.

We now expect the ECB to adjust its forward guidance in July to state that policy rates will remain at present levels – or lower – at least through the first half of 2020. We forecast a 10 basis point cut in the ECB’s deposit rate in September, to -0.50%.

Draghi’s comments also suggest that a tiering deposit system will be implemented to mitigate the impact of lower policy rates on the banking sector, although this could require further analysis from the ECB staff.

Last but not least, QE will be the natural policy response in the absence of improvement in inflation and inflation expectations. Our best guess is that the ECB could announce a QE2 programme of EUR50bn of monthly net asset purchases over 12 months, including EUR5bn in corporate bonds and EUR45bn in public bonds.

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