ECB Leaves Rates Unchanged As Expected, Will Examine QE Options

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    Helmholtz Watson

    ECB interest rates on the main refinancing operations…


    Helmholtz Watson

    Draghi opening statement:

    Data point to somewhat weaker growth in Q3 and Q4
    Inflation pressures muted
    We have tasked Euro system Committees to examine options
    Weakness primarily due to softer global growth, and hurting Eurozone manufacturing
    Significant monetary stimulus is needed
    Risks around growth outlook are still tilted to the downside, relating to uncertainty and protectionism
    Inflation likely to decline in coming months but will rise near year-end

    “We have tasked Eurosystem Committees to examine options, including ways to reinforce forward guidance, mitigating measures, such as the design of a tiered system for reserve remuneration, and options for the size/composition of potential new net asset purchases”

    Helmholtz Watson

    Draghi Q&A:

    Any rate cut would come with mitigating measures
    No discussion about cutting rates today
    Want to see next round of projections before taking action
    It’s difficult to be gloomy today
    The risk of recession is pretty low
    Outlook is getting worse and worse
    Previous forecasts showed rebound in Q2 but now incoming signs show weakness
    The balance of risks is on the downside
    The prolonging of uncertainty is a materializing of risks
    Draghi highlights easing bias and high degree of optionality
    We had a broad discussion, on most things we converged
    There were different nuances, as you would expect from such a broad package
    Mandate to committee is broad
    We don’t like what we see on the inflation front

    Helmholtz Watson

    [b]ECB economic bulletin
    US-China trade war has sapped confidence and held back investment
    Global trade is likely to remain weak in the coming quarters
    Global trade likely to pick up only gradually in the coming quarters
    Will remain weaker than overall economic activity
    The threat of further escalation of trade tensions persists

    Helmholtz Watson

    ECB Expectations:

    10 bps reduction in the deposit facility rate 100% priced in
    Odds of 20 bps rate cut since ECB Rehn’s comments about stimulus last week to 53% before reports of Germany possibly looking to spend reduced bets to ~30% currently.

    Helmholtz Watson

    ECB Klaas Knot and President of the Dutch central bank De Nederlandsche Bank (DNB) Sounding Hawkish

    Sees no ‘value added’ in ECB launching package of measures
    Market expectations for Sept ‘overdone’
    Sees ‘minor’ revisions to September forecasts
    ECB should keep powder dry in case of new shock


    ECB sources say policymakers leaning toward rate cut, tiering, reinforced guidance in September 12 stimulus package
    Many also support QE, but opposition from some northern states complicates discussion

    – Reuters

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