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ECB disappointed markets by being far less aggressive - RBS

FXStreet (Delhi) – Research Team at RBS, notes that the combined ECB package of easing measures was far less aggressive than markets had expected.

Key Quotes

“The ECB cut the deposit rate by 10 basis points to -0.3%. The Asset Purchase Programme (APP) was formally extended to March 2017 (from September 2016) but left unchanged at €60 billion.”

“This absence of any aggression will do little, in our view, to improve the ECB’s credibility. Indeed we think it is - and will remain - quite damaging. It certainly reinforces our cautious sub-consensus view toward the economy and the inflation outlook. And it paves the way for some further necessary accommodation in 2016.”

“Specifically we look for roughly 40bps of deposit rate reductions and a further expansion of €40 billion in the monthly QE programme during 2016. But even this might still be “too little and too late” to fend off persistent domestic and global disinflationary pressures.”

“In Strategy we expect the fundamentals to generate downward pressure on rates in the longer-term. This is another example of the ECB missing an opportunity in our view. But in the near-term the outlook is murkier as the market will naturally re-assess the ECB’s willingness and ability to get ahead of the curve. This re-assessment comes at an awkward time if, as we expect, the Fed lifts policy rates on December 16th. Also the centre of gravity in the ECB Council may not be as overwhelmingly tilted toward the doves as had been assumed. That means it may take longer for the incoming data (which we think will be quite soft) to shift expectations toward further easing.”

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