ECB: Market pricing is too aggressive - Natixis

Jean-François Robin, Research Analyst at Natixis, explains that the market pricing is too aggressive when it comes to ECB, as it puts the probability of a hike in the deposit rate this year at 50%, when in their core scenario they do not see this happening before 2018.

Key Quotes

“Our view is that the European Central Bank (ECB) will wait for the outcome of the French elections (those in Germany are a non-event as there is no risk that country will want out of the euro) before modifying its forward guidance. Gradually, the ECB should signal that risks are less tilted on the downside and now more balanced. It could also remove any reference to the possibility of further cuts in key policy rates from current levels.”

“As we see things, it is only later, possibly in September, that the central bank will start communicating about a tapering (but even then suggesting that nothing is certain...) and indicate that purchases will be scaled back from €60bn to €40bn at the start of 2018. In the best of cases, the APP would end in June 2018, only after which would there be a hike in the deposit rate, possibly at end2018. As yet, Ewald Nowotny and Ignazio Visco remain in a minority in the Governing Council. We lend more credence to official statements (e.g. Peter Praet setting the record straight yesterday), to the effect there will be no hike in the deposit rate before the end of QE, therefore not before H2 2018.”

“On this basis, the first hike in the repo rate is not expected before Q1 2019, whereas it is priced by the market in December 2018. This seems too optimistic (we see inflation averaging only 1.8% in 2018, and even then based on the assumption crude oil prices will recover to $70/bbl).”