Assessing The Aftermath Of ECB Policy Action


BMI View: The European Central Bank (ECB) has delivered on nearly all of the policy options that we were expecting for the June 5 meeting. This is a step in the right direction for warding off the risk of deflation and will be positive for European equities and sovereign bonds. However, we warn - as we have done countless times during previous easing rounds - that the efficacy of ECB policy action will be limited absent structural reforms in the eurozone at the national and federal level.

Having upped the rhetoric in the run up to the June 5 monetary policy meeting, there was a risk that the European Central Bank (ECB)'s efforts to manage expectations could backfire in the event of the policy outcome falling short of the mark. However, by and large the ECB enacted the policy measures that we had expected (see Crunch Time For The ECB: A Policy Primer, May 2014). We reiterate our initial response to yesterday's meeting:

"The European Central Bank (ECB) introduced an array of measures to ease monetary policy on June 5. These included a 10bps cut to the refinancing rate (to 0.15%) and the deposit rate (to -0.10%), a 35bps cut to the marginal lending rate (to 0.40%), targeted long-term refinancing operations (TLTRO, of EUR400bn), a suspension of SMP (securities market programme) sterilisation, and an extension of short-term fixed-rate full-allotment lending. We previously argued that a 10bps cut to the refinancing and deposit rates, a targeted LTRO of under EUR500bn and a suspension of SMP sterilisation were medium-to-high probability events, and that there was a good chance that this mix of policies would be implemented at the June 5 monetary policy meeting. We also pointed out the possibility of a negative deposit rate being applied to current accounts covering the minimum reserve system (which the ECB has now introduced). The ECB did not unveil an Asset Backed Security (ABS) purchase programme, which we attached a medium-to-high probability to, but has indicated that it is preparing the way to implement such a scheme. Finally, we asserted that a cut to banks' minimum reserve ratio requirement was unlikely and that there was a low probability of a quantitative easing programme being introduced, but a slightly higher probability of a preannounced QE programme (essentially a blueprint for how QE could be implemented if necessary). The ECB did not cut reserve ratios or introduce a QE programme as expected, and also made no preannouncements on QE."

Has Draghi Delivered?
Eurozone - ECB Policy Measures, EURbn

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Sector: Country Risk