FXstreet.com (Barcelona) - The ECB is announcing its monetary
policy decision right at tomorrow's meeting and markets will be
eyeing the event closely as macro data implies about a 20bps bias
in favor of a rate cut. "The question then becomes which rate to
cut, how to account for all the excess liquidity in the system
already via the 3y tenders, and how to account for the OMT
announcement effect in relieving peripheral spreads", wrote Richard
Kelly.
"While we were disappointed in our call for an ECB rate cut in
December, the stories that followed suggested that a majority of
the Governing Council was actually in favour of a rate cut, but
were overruled by Draghi, Weidmann, Asmussen, and Cœuré. The data
does seem to be at a turning point, but it is taking that turn
painfully slowly", added the analyst, not expecting those members
to shift their votes. In terms of rates, a deposit rate cut would
have more impact as that is the barrier for EONIAs to move lower,
but the harder to agree on. "If there is a cut this month, we think
it would only be the refi. But with ongoing poor data, the risk of
a deposit rate cut should still grow for February and March",
continued the TD Securities expert, also pointing out the first
anniversary of the 3y LTRO and first chance for banks to close out
those tenders early.
"We expect to see about €100-150bn of the €1,020bn in outstanding
3y LTROs (plus another €100bn in shorter-term tenders) closed out
early in Q1, but we would still need to see around another €200bn
in liquidity drained from the system before this had an impact on
EONIAs, which continue to run around a spread of 70bps below the
refi rate", he continued, expecting little change in this spread
until tenders in the system fall below €800bn. "And until the
tenders fall to €400bn, we are unlikely to see the spread trading
back within 10bps of the refi rate". TD Securities analysts add
another reason for the ECB to keep rates on hold: "not adding any
extra incentive on any bank to hold onto this liquidity longer, as
expectations for a rate cut would imply an even cheaper cost of
funding for 3y LTROs where the interest rate charged is a three
year average of the refi rate".
In regard to the OMT programme, it is unlikely that Spain requests
aid this month with the €28.5B redemptions, but €41B in March and
April could add pressure as markets look into the Italian elections
and the US debt ceilling showdown.