The ECB has cut the refi rate to 0.05% and the deposit rate to -0.2%. The cut in interest rates was probably due to the 5y5y inflation expectations (which the ECB usually uses for defining medium-term inflation) declining below 2% in August.
We now await the press conference to see whether Mario Draghi will announce any non-standard measures.
We expect the ECB to reveal more details about ABS purchases. Our view is that the real hurdle for ABS purchases is not for the Governing Council to decide to start buying the loans, but to find out how to do it effectively. This makes it hard to judge when a programme will be announced, but given the latest comments about the progress in the preparation we believe more details will be released today. In the euro area, ABS purchases should be more effective from a growth and inflation perspective because the economy is based on the bank lending channel. It would also make the TLTROs more effective as it removes loans from the banks' balance sheet and hence increases the banks' lending capacity to the real economy due to capital requirements.
We do not expect the ECB to announce a broad-based QE programme. We still believe the bar for QE is high - at least in the near term. No other major central bank has introduced negative rates when reaching its zero lower bound and given that the ECB has suggests how high the hurdle to asset purchases is. The fact that the Governing Council (GC) dug deep into the toolbox of unconventional measures suggests that some members doubt the effectiveness of broad-based QE. Consequently, we believe Draghi will not be able to convince the rest of the GC to announce a broad-based QE programme only three months after the significant June easing.
Nevertheless, the likelihood of the ECB going down the QE path in 2015 has in our view increased. Draghi recently indicated that medium-term inflation expectations are less anchored and the comment should be seen in relation to a previous speech, where Draghi stated that a worsening of the medium-term outlook for inflation would be tackled by broad-based QE. In light of this, we expect a very dovish statement which could include comments of whether there are signs that medium-term inflation expectations have started to be de-anchored and that the ECB is ready to go down the QE path in case it continues.
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