Analysts at BofA Expect a 10 bps Cut to the Deposit Rate from ECB in March

Mario Draghi suggested policy measures could be ramped up at the next meeting; according to analysts at BofA such an increase will probably involve a 10 bps cut in the depo rate, although in their view more is needed.

After saying that the ECB would be rethinking their policy at the March meeting in the light of the recent global economic slowdown and stagflation, Mario Draghi has got forecasters speculating as to what shape or form such a rethink would take.

Analysts at Bank of America expect Draghi to probably only cut the ECB deposit rate in March – the rate it charges banks for looking after their money – by 10 basis points to -0.40% and leave QE at the same level.

BofA do not think such a limited move, which in their eyes constitutes “more of the same” will be enough, and see an eventual increase in QE as necessary – probably by 10bn per month - to achieve the central bank’s inflation target.

In their note, however, BofA also home in on Draghi’s comments about there being, “no technical limits” to the policy tools available to the governing council, and think this might lead to the implementation of some interesting new strategies:

“We suspect that the ECB cannot stick to "more of the same" and merely extend the purchases by a few months and take the depo rate down by another 10 bps.

“The toolbox will likely be re-opened wide. That "no technical limits" constrain the ECB stance is an important statement, in our view.

“The ECB's staff creativity is going to be tapped in the next few weeks.

“We can only hope that the communication around the debate on the new package will be clearer than during the run-up to the December meeting.”

Nevertheless, their base-line scenario remains for a 10 bps cut to the deposit rate in March.

Draghi's Surprise

The euro started falling rapidly on Thursday after Mario Draghi said that the ECB would be "reviewing and reconsidering" policy at the next March meeting, hinting that more accomodation might be required to offset defaltionary trends. 

“It will therefore be necessary to review and reconsider our monetary stance at our next meeting in March, when our next macro-economic projections will be available.” Said Draghi in the opening statement. 

The President of the ECB also highlighted downside risks emanating from the crisis in emerging markets as well as subdued commodity prices. 

He said lending rates would remain at their current level or lower for an extended period of time.

Whilst he underlined how well ECB policies implemented since 2014 were working, he also made it clear that inflation was not rising in line with expectations. 

By emphasizing how well the policies implemented were working - he appeared to indicate that more measures might therefore be called upon to bring inflation back into line with expectations. 

In the press conference Draghi said that the decision to reconsider the stance in March had been "unanimous", leading to further downside in the euro exchange rate, which was 100bps lower, trading at 1.0805 at the time of this update. 

Rates On Hold

The ECB kept rates unchanged at their January meeting.

The Refinancing Rate was maintained at 0.05%, the Marginal Lending Facility at 0.30% and the Deposit Rate at -0.30%.

The decision fell in line with most analysts’ expectations.