STEVEN ENGLANDER: The Best Reason Not To Expect Too Much From The ECB

mario draghi ecb european central bank

Photo: European Commission

Investors have high hopes that the European Central Bank will make big moves in its next monetary policy decision on Thursday in the wake of an EU summit that exceeded expectations.But Citi’s FX team has its doubts that the Bank will live up to the hype.

Steve Englander, the Head of G10 Strategy, writes in a note out today that the ECB’s policy response is likely to disappoint for one big reason: policy can’t actually fix the crisis.

From the note:

The strong expectation in markets is that the ECB will do a refit cut and some reduction in deposit rates, but if this is all they do we think investors will walk away disappointed and sell the euro…

With effective rates trading well below the policy rate it is very difficult to gauge exactly what the market is expecting from the ECB. Clearly the cut to 75bps is a strong consensus view and there probably is some deposit rate cut also expected. In practice these would amount to little more than showing the flag – were the euro zone’s sovereign debt issues solvable via policy rate cuts, those would have been put in place long ago.

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