As such, some now think the ECB could opt to just fine tune the rate when it announces its decision at 1145 GMT, or hold off altogether, even though a weaker euro would be a boon for the bloc's struggling exporters.
More than two-thirds of the 46 banks and think tanks polled by Dow Jones Newswires forecast that the ECB will cut its one-week lending or "refi" rate by 0.25 percentage points to 0.75% while nine are predicting a deeper cut to 0.50%.
But there is growing speculation too that the ECB may also lower its overnight deposit rate, the interest it pays commercial banks on the deposits they park with the ECB, which is currently at 0.25%.
"It is tempting to assume that an ECB rate cut does not matter today," said currency strategist George Saravelos at Deutsche Bank in London.
"If the central bank just cuts the refi, we would agree... [But] we think that what happens to the deposit rate is of far greater significance...particularly if it is cut to zero," he said.
Why the deposit rate should matter so much is because the ECB overnight deposit window has sucked in funds. Despite a slew of cash injections, some banks wary of lending to their peers are continuing to park their excess funds with the ECB.
Banks deposited 790.98 billion euros ($994.29 billion) at the ECB's deposit facility on Wednesday.
If a deposit rate cut makes it uneconomic for money market funds to park their funds with the ECB, all that money would have to go elsewhere, presumably to debt havens which already have skinny yields.
A cut in the deposit rate to 0%, in particular, could drag yields on top-rated debt that is used as collateral to borrow funds from the market down into negative territory. Treasury bill yields--which are already negative for those countries that are perceived to be havens, such as Switzerland--may fall further.
As such some market strategists, such as Alessandro Giansanti at ING, think it more likely now that the ECB will lower the deposit facility by just 10 to 15 basis points. Others, such as Peter Chatwell at Credit Agricole CIB, think the ECB could even leave the deposit rate unchanged.
For foreign exchange markets, the concern is also that any cut in the ECB deposit rate would leave it below the deposit rates of other central banks, including the Federal Reserve, potentially provoking big portfolio outflows as capital seeking higher returns exits the euro zone.
In the case of a cut to 0%, the ECB's deposit rate would drop below that of Japan, which has a deposit rate closer to just 0.10% percentage points, Saravelos said.
That would have a sustained negative impact on the euro by making it the pre-eminent global currency of choice to sell when investing in higher yielding currencies, he said.
For the latest updates on the stock market, PRESS CTR + D or visit Stock Market Today For the latest updates PRESS CTR + D or visit Stock Market news Today
No comments:
Post a Comment