ECB at a crossroads – Fidelity
|Dierk Brandenburg, Senior Sovereign Analyst at Fidelity International, comments on today’s ECB meeting and the potential outcomes.
Key Quotes
“The ECB will soon find itself at a crossroads, and will have to assure the market in principle that its QE programme will continue despite the negative side effects on the financial system. The lack of available risk-free collateral is the key issue for the bond market. With EUR 1.2tn EUR worth of government bonds now trading below the deposit rate, and therefore not eligible for the ECB’s PSPP, the ECB has two choices.
“They can reduce their deposit rate further from the current -40bp, buying more short dated bonds. Similar to a deposit rate cut, this would steepen European government bond curves and move core long-end rates further into negative territory. We do not believe that this will be welcomed by European banks, whose margins are under pressure already.
“The only realistic option for the ECB is to allow its member central banks to shift purchases away from scarce assets, such as Bunds, towards the bigger peripheral markets such as Italy, thus discreetly deviating from the capital key constraint over time. Politically, this is a tricky decision, and one that the Governing Council will take only after lengthy consultations later in the year.”
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.