At its July monetary policy meeting, the ECB opened the door to fresh stimulus measures to respond to the subdued Eurozone growth outlook and persistent below-target inflation. In an effort to pave the way for further rate cuts, the ECB changed its forward guidance to say that it expects interest rates “to remain at their current level or lower” at least through the first half of 2020. In addition, ECB President Mario Draghi stated that the central bank is examining further policy options, including 1) a reinforcement of its forward guidance on rates, 2) the introduction of mitigating measures to deal with the unwanted side-effects of negative rates and 3) the restart of the quantitative easing program, including its size and composition. He underlined the ECB’s determination to act by stressing the symmetry in its inflation target. We expect the ECB to announce a policy package in September that includes a 10bp cut in the deposit rate to -0.5%, together with the introduction of a tiered system, as well as the restart of the QE program. On the latter, we expect monthly purchases of at least EUR 30bn, with a stronger focus on corporate and supranational bonds and a higher issuer limit in relation to sovereign bonds. The bottom line: expect ECB monetary policy to remain low – or even lower – for much longer, at least through 2021.
