Despite growing reservations about its ability to stimulate economic activity, Goldman Sachs believes that the European Central Bank (ECB) will deliver further monetary policy easing at its March 10 meeting, predicting the bank will not only cut deposit interest rates further into negative territory but also increase the size of its monthly asset purchase program.
“Against the background of weaker conjunctural indicators and still undesirably low inflation, a likely big downward revision to the macroeconomic outlook in the updated staff projections and dovish comments from several Governing Council members… We now expect a more substantial easing package to be announced, including an increase in the monthly pace of asset purchases in addition to a lowering in the depo rate,” says Dirk Schumacher, a member of Goldman’s European economic team.
Not only does Schumacher predict the ECB will cut its deposit rate by a further 10 basis points to -0.4%, he suggests it may introduce a tiered system of interest rates that will apply to excess deposits held by the ECB, mirroring the move from the Bank of Japan when it adopted a negative interest rate policy in January.
“The main intention behind this announcement, in our view, would be to signal the potential for further rate cuts and hence an increase in the ECB’s room for manoeuvre along this dimension, says Schumacher. “We think, however, that many members of the Governing Council have reservations about too aggressive a use of this instrument and we therefore still view a 10bp cut in the depo rate as the most likely scenario.”
Alongside a further reduction in the ECB’s deposit rate and the possible implementation of a tiered interest rate system, Schumacher also expects the bank to increase the size of its monthly asset purchase program (APP) by €10 billion to €70 billion per month.
“While a rise in the purchase volume would increase concerns about a potential scarcity of German Bunds, we do not think that the ECB will announce at this stage a change to any of the parameters of the APP to address this problem,” says Schumacher. “We also continue to expect an extension of the programme from March 2017 currently to September 2017.”
Having hit a high of 1.1375 against the US dollar in early February, the euro has subsequently fallen by over 4% in recent weeks, coinciding with increased expectations of further easing from the ECB along with improved economic data in the US.
While the ECB has no specific euro target, at least in official communications, it’s clear that Mario Draghi, among others, would like to see that trend maintained.