Back
3 Apr 2013
Forex Flash: ECB could alter policy after bad enough data in April – TD Securities
FXstreet.com (Barcelona) - TD Securities analysts said that the ECB’s dilemma is that the underlying premise of their policy is being questioned, as growth in the first half of 2013 has been a write-off as expected. “In fact, Eurozone hard data (IP, retail sales, international trade, etc.) published since mid-November has trended no better than in-line with expectations. The upside surprises we saw last autumn, as financial conditions improved, failed to be either as strong or as long as would be normal for the improvement in financial conditions that we saw”, wrote analyst Richard Kelly, adding that the ECB’s transmission mechanism was broken and it seems to have leaked out of the system.
In regard to a change in the monetary policy, the IFO survey was strong enough to mitigate the tracking for the Eurozone until March surveys universally disappointed, so there is nothing yet to drive a case for the ECB to flag downside risks just one month after making new forecasts. “So if the data is bad enough over the next month, this could trigger a response, or at least flagging the risks for June”, Kelly wrote, expecting a refi rate cut and narrowing of the corridor as the likely move in such scenario. “While it would provide limited stimulus to the economy via traditional channels with liquidity depressing Eonias towards the deposit rate already, the rate cut would cheapen funding for banks that still have outstanding LTROs and would hope to improve sentiment”, he continued, pointing to new LTROs as an option too (less likely) as peripheral banks could help stem the risk of deposit flight in the best case scenario (though we have seen little signs this will be an issue) or replace the lost deposits with LTRO funding on banks’ balance sheets.
In regard to a change in the monetary policy, the IFO survey was strong enough to mitigate the tracking for the Eurozone until March surveys universally disappointed, so there is nothing yet to drive a case for the ECB to flag downside risks just one month after making new forecasts. “So if the data is bad enough over the next month, this could trigger a response, or at least flagging the risks for June”, Kelly wrote, expecting a refi rate cut and narrowing of the corridor as the likely move in such scenario. “While it would provide limited stimulus to the economy via traditional channels with liquidity depressing Eonias towards the deposit rate already, the rate cut would cheapen funding for banks that still have outstanding LTROs and would hope to improve sentiment”, he continued, pointing to new LTROs as an option too (less likely) as peripheral banks could help stem the risk of deposit flight in the best case scenario (though we have seen little signs this will be an issue) or replace the lost deposits with LTRO funding on banks’ balance sheets.