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ECB: so what’s next? - Rabobank

FXStreet (Guatemala) - Analysts at Rabobank explained that the ECB was not necessarily a bad outcome.

Key Quotes:

"As we believe that too much focus on trying to weaken the currency could ultimately backfire (either in terms of retaliation by other central banks or in lower commodity prices through a stronger dollar). Moreover, we have often expressed our concerns about the effectiveness and market-distorting nature of negative rates and aggressive asset purchases. So, indeed, one could even argue that “sanity” has prevailed. After all, it’s still an easing package albeit less powerful than expected.

"At the same time, the ECB may now be taking a gamble. Whereas in the past it has shown a preference to err on the side of caution and try to be ahead of the markets, it is now in the backseat again. If the economic fundamentals and inflation improve, the ECB still wins, but if those fundamentals don’t improve sufficiently quickly, there is now a bigger risk that long-term inflation expectations would slip again.

With opposition in the Governing Council obvious, any further easing measures could be expected to be facing delays. This also explains why the impact of today’s announcements on Eonia and Euribor forwards has been relatively strong: the market has little faith left now that the ECB will do another deposit rate cut again in the near future.

The 1y Eonia swap has risen by more than 10bp, despite the 5bp negative surprise in the deposit rate cut. We agree that this looks to have been the “final one” under the conventional policy pillar. We expect policy rates to remain at their current levels in the foreseeable future."

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