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Escaping from planet NIRP

Summary:
The ECB could announce further changes to its forward guidance in June as part of its exit strategy from negative rates. But we think proper rates normalisation will only start in late 2019.The debate over the ECB’s exit strategy from its negative interest rate policy (NIRP) has started in earnest. Recent comments point to a possible reversal in the exit sequencing, with a deposit rate hike preceding the end of net asset purchases.A one-off adjustment in negative rates would have some merits, including for banks’ interest margins, but also if it is part of a trade-off for a prolonged QE programme.However, any ECB tightening would pose communication challenges. For the first exit steps to be manageable, several conditions need to be met, including a very cautious approach to QE tapering amid idiosyncratic risks in Italy. We think the ECB will insist on the difference between a “one-off adjustment” in its deposit rate and a “proper normalisation cycle”.We expect a change in the ECB’s forward guidance at the 8 June meeting, a first deposit rate hike in Q2 2018 and the rates normalisation cycle to start very slowly in late 2019. Risks are skewed towards an earlier rate hike but a longer QE, in our view.

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The ECB could announce further changes to its forward guidance in June as part of its exit strategy from negative rates. But we think proper rates normalisation will only start in late 2019.

Escaping from planet NIRP

The debate over the ECB’s exit strategy from its negative interest rate policy (NIRP) has started in earnest. Recent comments point to a possible reversal in the exit sequencing, with a deposit rate hike preceding the end of net asset purchases.

A one-off adjustment in negative rates would have some merits, including for banks’ interest margins, but also if it is part of a trade-off for a prolonged QE programme.

However, any ECB tightening would pose communication challenges. For the first exit steps to be manageable, several conditions need to be met, including a very cautious approach to QE tapering amid idiosyncratic risks in Italy. We think the ECB will insist on the difference between a “one-off adjustment” in its deposit rate and a “proper normalisation cycle”.

We expect a change in the ECB’s forward guidance at the 8 June meeting, a first deposit rate hike in Q2 2018 and the rates normalisation cycle to start very slowly in late 2019. Risks are skewed towards an earlier rate hike but a longer QE, in our view.

Frederik Ducrozet
Mr. Frederik Ducrozet is a Senior Econoist at Banque Pictet & Cie SA, Research Division. Prior to this, he served as Senior Eurozone Economist at Credit Agricole Corporate and Investment Bank, Research Division from June 2006 till September 2015. He joined Crédit Agricole SA in 2005. Mr. Ducrozet contributed to the various publications of the research department, with a special focus on macroeconomic developments in Eurozone countries, including on the outlook for fiscal policy and the ECB’s monetary policy. Do not hesitate to contact Pictet for an investment proposal. Please contact Zurich Office, the Geneva Office or one of 26 other offices world-wide.

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