As expected the ECB announced a comprehensive monetary stimulus package at its September meeting consisting of a range of policy instruments including a 10bp cut in the deposit rate to -0.5%, a revamp of its forward guidance – by linking the interest rate outlook to underlying inflation developments – the introduction of a tiered deposit system, more favorable TLTRO III terms and, last but not least, an open-end QE program with monthly purchases of EUR20bn. Despite today’s big stimulus package, we expect the ECB to further loosen its monetary policy stance in 2020 in an effort to comply with its inflation target of close to but below 2% in the context of subdued macro prospects in the Eurozone and further policy loosening by the Fed as a response to a U.S. growth soft-patch. In particular we expect the deposit rate to be cut on two more occasions over the course of 2020 to -0.7% while monthly QE purchases could be increased further to EUR30bn as early as April 2020. In order to do so the ECB will be forced to raise the issuer limit from currently 33% to below 50% to ensure implementability of the QE program.
