7 Nov 2013
Flash: ECB surprises 'big time' with three key decisions - Rabobank
FXstreet.com (London) - A research team at Rabobank noted the ECB has decided today to cut its main refinancing rate by 25bp to 0.25% explaining most market participants, including ourselves, had either expected the Governing Council to wait until December or to wait even longer (in fact we had our doubts about a cut at all).
Key Quotes:
“Alongside this decision, it kept its deposit rate at zero, but cut the rate on the marginal lending facility by 25 basis points to 0.75%. As such, the corridor for key ECB interest rates has effectively become asymmetric now”.
“in the press conference President Draghi defended this decision by the fact that the upper bound is pretty much ineffective at this stage because the ECB is pursuing a policy of full allotment in its refinancing operations and because there is (still) excess liquidity in the money market. By keeping a 50bp spread between the marginal lending rate and the refinancing rate there would be sufficient incentives for banks to maintain efficient liquidity policies”.
“The second decision was to maintain the forward guidance unchanged. This is significant because when the ECB says that it expects “the key ECB interest rates to remain at present or lower levels for an extended period of time”, this must now be interpreted as hinting at the possibility of negative rates (of course, they could reduce the refi rate by 10bp to get away with it)”.
“The third decision was to continue conducting the main as well as the special-term and long-term refinancing operations as fixed rate full allotment procedures until, at least, the end of 2015Q2”.
Key Quotes:
“Alongside this decision, it kept its deposit rate at zero, but cut the rate on the marginal lending facility by 25 basis points to 0.75%. As such, the corridor for key ECB interest rates has effectively become asymmetric now”.
“in the press conference President Draghi defended this decision by the fact that the upper bound is pretty much ineffective at this stage because the ECB is pursuing a policy of full allotment in its refinancing operations and because there is (still) excess liquidity in the money market. By keeping a 50bp spread between the marginal lending rate and the refinancing rate there would be sufficient incentives for banks to maintain efficient liquidity policies”.
“The second decision was to maintain the forward guidance unchanged. This is significant because when the ECB says that it expects “the key ECB interest rates to remain at present or lower levels for an extended period of time”, this must now be interpreted as hinting at the possibility of negative rates (of course, they could reduce the refi rate by 10bp to get away with it)”.
“The third decision was to continue conducting the main as well as the special-term and long-term refinancing operations as fixed rate full allotment procedures until, at least, the end of 2015Q2”.