“Ahead of this week’s eagerly anticipated ECB meetings, expectations for action appear to have converged around a 10bps cut in the deposit rate, from -0.30% to -0.40%, possibly with a two-tier structure, and an €10bn increase in the pace of monthly buying from €60bn to €70bn,” he said.
“The two-tier deposit rate structure would allow for different deposit rates on different levels of excess reserves, and would help banks, whose net interest margins are being affected by negative rates,” Le Saout added. After that, it gets a bit more complicated. The ECB could consider deviating from purchases made according to the ECB’s capital key and maybe focus on market-capitalisation measures.”
Le Saout also noted that policy options such as scrapping the ban on buying bonds yielding below the deposit rate, buying corporate bonds could come into play this week, although he said such a move would be controversial.
“[This policy] is not favoured by the Bundesbank faction,” he said. “This option would raise questions such as who would manage the credit risk, what issuers to buy, the potential for causing market dislocations etc. Even if the ECB do decide to buy corporate bonds, we doubt they would consider buying senior bank debt – this would most likely be seen as providing state aid to banks, which is no longer allowed under EU law.”
Le Saout also flagged up the possibility of an extension of the QE programme beyond its current end date of March 2017 being announced this week, but he thinks the ECB is likely to hold off on this until later in the year.