Wednesday, 17 April, 2019

Update

The combination of the recently announced TLTRO-III and extension of the ECB’s forward interest rate guidance – committing to keeping policy rates at low levels for longer – has caused the Eonia forward curve to flatten. Having started to price in a modest 10bps hike a month ago, the market now expects no change in policy rates over the next 18 months. Even with policy rates in negative territory, the balance of risks is not necessarily asymmetric. Indications that some form of deposit tiering has been discussed suggests that the ECB could seek to push policy rates even lower in a scenario in which the economic downturn worsens. For the time being, however, market pricing is unlikely to materially shift given the limited scope for further policy innovations at this week’s ECB meeting.