Wednesday, 17 April, 2019

Full round up of Bank Views on the ECB

Barclays:
• Expect no policy announcements but lively Q&A.
• As highlighted in the March minutes, GC members have raised concerns about the impact of low rates on bank profitability, bank intermediation and financial stability. This was followed by comments from Chief Economist Peter Praet who indicated that the ECB was looking into options including deposit tiering.
• Even if the ECB were to introduce tiering, this would not be until the summer at the earliest.
• The ECB will still need more time to consider the details of the new TLTRO. With technical work ongoing, June is more likely for an announcement on TLTRO-III details.
• Banks will likely be incentivised with lower borrowing rates if they meet lending targets.

Daiwa:
• Expect no significant developments at this meeting.
• Further details on TLTROs will not be announced yet.
• Draghi will reiterate that the ECB is alert to downside risks, but there will be no indication of further policy action in the short term.
• During the Q&A Draghi is likely to be asked about his recent comments in which he stated that the ECB would “preserve the favourable implication of negative rates for the economy while mitigating the side effects”.

Danske:
• No new policy signals are expected from the ECB at this week’s meeting.
• Draghi is expected to repeat his ‘delayed, not derailed’ inflation message. However, he will strike a cautious tone and reiterate the downside risks to growth.
• The ECB is not expected to announce the modalities for the new TLTROs, which are instead expected at the June meeting.
• Questions on deposit tiering are likely to come up during the Q&A, but no additional colour is expected beyond the comments provided recently by Chief Economist Peter Praet.

Deutsche Bank:
• Deutsche Bank believes that the market was underwhelmed by the measures announced at the March meeting which, given the large downward revisions to the official growth forecasts, now requires the ECB to clarify its reaction function.
• The June meeting is the most likely date for the ECB to announce new policy measures.
• TLTRO-III is not sufficient for managing funding risks.
• Deposit tiering is now expected as part of Deutsche Bank’s baseline scenario. Although tiering will not be a silver bullet for the economy or the banks, it is likely to form part of a broader credit easing strategy alongside adjusted forward guidance, incentivising take up of TLTRO-III and possibly some new tools such as restarting asset purchases or even extending the scope of QE to new asset classes.

HSBC:
• No new policy announcements are expected at this meeting. Instead, the focus will be on potential details on TLTRO-III and whether the ECB will move towards a tiered system of reserve remuneration.
• Given that there is no pressing need to announce further details on the TLTROs for now, the ECB will likely wait until June to do so, by which point the Governing Council would have had more time to assess the dataflow.
• When these details are announced, HSBC believe that the terms will be relatively generous. If the terms are not sufficiently generous, take-up could be a lot lower.
• Draghi is likely to field questions on deposit tiering. HSBC expect any potential move towards deposit tiering to be contingent on the ECB admitting that policy rates need to remain at current – or even lower – levels for a lot longer. Given that the ECB currently expects inflation to return to target, this is unlikely for now.

Goldman Sachs:
• ECB officials are in wait-and-see mode and will likely focus discussion on the economic outlook.
• A move towards deposit tiering would be premature for this week’s meeting.
• Further details on TLTRO-III are more likely to be announced in June as the ECB would seek to retain some optionality on deciding the attractiveness of these operations.
• However, Draghi could indicate during the Q&A that TLTRO-III pricing could be adjusted quickly to react to evolving economic and credit conditions.
• The narrative is likely to follow from Draghi’s previous characterisation of the economy, with growth expected to rebound but with downside risks.
• The data flow since the March meeting broadly confirms the ECB’s narrative of persistent uncertainty around the global growth outlook, which contrasts with domestic resilience.
• Forward guidance on policy rates will remain unchanged from the March meeting.
• The Introductory Statement is unlikely to make explicit mention of the side effects of negative rates on bank profitability or potential mitigating measures.
• Instead Draghi could repeat his remarks from the ECB Watchers speech during the Q&A. This would mean reiterating that the ECB is monitoring the implications of low bank profitability for the transmission of monetary policy, while stressing that it is not concerned at this stage. However, Draghi could also make clear that the ECB will continue monitoring this issue in the context of policy rates remaining at present low levels until the end of the year.
• Looking ahead to June, GS believes that if growth rebounds (their base case) then the Governing Council would be on track to normalise policy instruments, with the first rate hike expected in mid-2020. This could also see the ECB opt for less attractive pricing of TLTRO-III to reinforce the notion that it is purely a funding backstop for the banks.
• If, however, economic activity continues to deteriorate, the GC would opt for further policy easing along the lines of a further adjustment to forward guidance as the first line of defence, with the possibility of deposit tiering and more attractive TLTRO-III pricing. If these measures proved insufficient, the GC could consider restarting net asset purchases and cutting the deposit rate further.

JPM:
• JPM believes that the policy response in March was relatively lacklustre and gave the impression that the ECB policy toolbox was pretty much empty.
• Since then Draghi and Praet have indicated that staff are looking into a tiered reserve charging regime.
• Draghi is likely to be asked about deposit tiering in the Q&A. Morgan Stanley: • Expect the ECB to remain on hold at this week’s meeting.
• TLTRO-III details are unlikely to be announced before mid-year. By delaying the release of further details, the ECB retains some optionality to adjust the funding scheme (such as altering the borrowing rate) in order to better reflect economic conditions. As such, MS believe that the new TLTRO could be used as a simple liquidity facility or as a means to boost loan growth.
• The ECB is likely to indicate that global economic uncertainties remain high. The economic data has already deteriorated significantly, with tentative signs of improvement (from a low base).
• Having adjusted forward guidance at the last meeting, there is little need to do so again this week.
• The existing guidance states that policy rates will stay unchanged through year-end. MS believe it is unlikely that rates could be raised at the beginning of next year and so the forward guidance is likely to be adjusted again at some point.
• Tiered deposit rates could be considered in the future, but an announcement at this week’s meeting would be a stretch.

NatWest:
• No significant policy changes are expected this week, with the next meaningful decisions likely to take place in June.
• Deposit tiering will remain in the discussion stage for now. In any case, this would be a way to accommodate a longer period of negative rates, rather than signal imminent rate cuts.
• Details on TLTRO-III are likely to be announced in June while deposit tiering, if it happens, would come in September or later.

Nomura:
• Having introduced new policy measures in March, which were earlier than the market expected, the ECB is unlikely to make any further announcements at this week’s meeting.
• Instead, the focus will be on clues for the possibility of deposit tiering, the potential parameters of TLTRO-III and the appropriateness of the existing forward guidance.
• Nomura do not expect the ECB to introduce a tiered deposit system and certainly not at this meeting. There are various issues associated with tiering such as signalling that policy rates will remain lower for longer which risks flattening the yield curve and hitting bank profitability, the complexity of introducing such a system across member states, and the possibility of reducing the incentive for banks to search out riskier investments.

Nordea:
• The ECB is probably content with the existing easing package announced in March.
• If the Governing Council sees the need for further easing, this would likely involve an extension of forward guidance and more attractive terms for the new TLTROs. Nordea believes that both of these steps are likely in the June meeting.
• The ECB is not close to moving to a tiered reserve system and opening the door to further rate cuts, but this would become more likely if the outlook continues to deteriorate.

Rabobank:
• Little has changed since the last ECB meeting. Economic conditions have not improved, but neither has there been sufficient deterioration to warrant further policy action at this week’s meeting.
• Risks to the monetary policy outlook remain skewed in the direction of further easing.
• The ECB may take some comfort in the concentrated nature of the slowdown, which has not been uniform across all member states and has largely been confined to the manufacturing sector. However, doubts are emerging over the persistence of the slowdown, which could be longer than initially expected. • Rabobank do not see the ECB introducing tiered deposit rates in the near future. However, if the Governing Council is divided on the issue, concessions on TLTRO-III pricing could be offered as a compromise.

RBC:
• Expect no major policy changes.
• Details on new TLTROs including borrowing rates and incentive structures are likely to be announced in June.
• The ECB will be on data watch until then.

Scotiabank:
• Even after the major policy changes announced in March, the ECB could still have ‘another trick or two up its sleeves’ for this week’s meeting.
• Further technical details on TLTROs may be offered.
• Deposit tiering is likely given that Draghi has previously hinted at potential measures to dampen the effect of negative rates on the banking sector.

Societe Generale:
• No new policy announcements are expected at this week’s ECB meeting.
• Given that the ECB cut its 2021 inflation forecast to just 1.6% without taking additional measures beyond TLTRO-III suggests that the hurdles for cutting policy rates or restarting QE are high.
• At this week’s meeting discussion will likely focus on the generosity of TLTRO-III. Given current economic conditions, Societe Generale believe that an incentive structure similar to that of TLTRO-II is possible, although their working assumption is that banks could face an interest rate of -0.20% if lending expands in line with target.
• If pervasive uncertainty lingers beyond the summer, the ECB would have to further push out the date for the first policy rate hike, potentially until mid-2020. Under that scenario it is possible that tiering is introduced in order to shield bank profitability.
• Ultimately, TLTRO-III and tiering would be supportive on the margin for banks, but the macroeconomic impact would be limited. Significantly lower interest rates or a large-scale QE program would be needed in order to materially steepen the yield curve and boost confidence.
• Societe Generale notes that although there are various other policy tools available, their effectiveness is low and/or the hurdle for implementation is high.

TD Securities:
• This week’s ECB meeting is sandwiched between two important meetings and so is unlikely to result in any significant policy developments.
• Having announced TLTROs in March, TD expect the ECB to defer announcing further details until June. The Governing Council will want to observe economic conditions before deciding on the details of the new lending programme ahead of the September launch.
• Moving towards deposit tiering would be premature at this stage. However, given that there have been some indications that this is being discussed, Draghi is likely to field questions on it during the Q&A. He is likely to discount the need for deposit tiering at this point.
• Draghi is almost certain to reiterate that risks are tilted to the downside, despite some constructive evolution of data.
• Discussions around Brexit are likely to come up during the Q&A, particularly given that some ECB officials have expressed concerns about the downside risks to the euro area.

UBS:
• Expect no major news on the ECB’s overall assessment, TLTRO-III or ‘tiering’. • Further details on the new TLTRO are likely to be announced in June. At that point the ECB would have had sufficient time to observe credit and monetary policy conditions and can offer a tailor-made TLTRO.
• Discussion of deposit tiering is in full swing, but ECB deliberations on the issue are still only tentative. As such, Draghi is unlikely to comment in much detail.
• UBS expect demand for TLTRO to be relatively limited and skewed towards weaker segments of the eurozone banking sector. There is little incentive for banks to rollover current TLTRO-II loans into the TLTROIII; this might only happen in late 2020/early 2021 shortly before TLTRO-II expires.
• UBS view the new TLTRO more as an insurance policy rather than a tool to meaningfully boost credit growth.
• Looking further ahead, the first deposit rate hike (20bp) is expected in March 2020, with further hikes in June 2020 (20bps) and December 2020 (bps) at which point the deposit rate would be 0.25%.
• Should the ECB conclude that the deposit rate may have to stay negative for longer, then it is likely that deposit tiering would be introduced to ease the burden on the banking sector.
• The ECB will reinvest maturing securities from the QE portfolio in full for another 2-3 years before gradually reducing reinvestments.
• Obstacles to a new QE program are high.