Positive effect of ECB measures could be short-lived in light of coronavirus contagion
Expectations are high for upcoming ECB meeting.
Following the massive volatility spike in financial markets over the last two weeks and the major tightening in financial conditions, expectations are very high for the Thursday ECB meeting. The negative impact of coronavirus on GDP growth is still very difficult to estimate, but European growth could turn negative this year. In that context, this ECB meeting is very significant for financial stability in Europe going forward. Here is what we expect:
- We expect the ECB to cut deposit rates from -0.50% to -0.60%, but in the current situation this is not the most important change; we would not be overly surprised if the ECB were to keep rates unchanged.
- We expect an increase in asset purchases, most likely at a monthly pace of 40-50bn € for at least 6 months, with a strong wording highlighting the possibility to go further if needed.
- We expect those asset purchases to be skewed towards corporate bonds.
- We expect TLTRO conditions to be improved relative to existing terms with targeted measures for small and medium enterprises (SMEs). The tiering multiplier could also be increased.
All in all, we think that market reaction could be positive for credit and peripheral spreads BUT this could be very short-term. Given the current level of uncertainty and the development of the coronavirus crisis in different countries (France, Spain, Germany, the United States..), the impact of the ECB could prove to be short lived.
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