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ECB Signals Further Stimulus Measures Likely

In a prepared speech following the ECB’s decision to hold rates unchanged (the benchmark rate* at 0.05%, the deposit rate** at -0.2%, and the marginal lending rate*** at 0.30%), ECB President Draghi hinted at the possibility of further stimulus by year end. The mere mention that a future cut in the benchmark rate was discussed at the policy meeting was enough to send government bond yields tumbling; German 10-year yields fell below 0.50% for the first time on record, while the euro-area 2-year swap rate fell into negative territory (chart).

German 10-Year Yields and Euro-Area 2-Year Swap Rates

 

Echoing remarks made by Fed Chair Yellen (who had commented that “recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term,”) Draghi noted that “concerns over growth prospects in emerging markets and possible repercussions for the economy from developments in financial and commodity markets continue to signal downside risks to the outlook for growth and inflation.” Draghi added that “increased uncertainty has recently manifested itself in financial market developments, which may have negative repercussions for euro area domestic demand.”

The potential for further policy action—either via a reduction in rates or the extension of the Central Bank’s €60 billion monthly asset purchase program—knocked 1.9% of value from the euro vs. the U.S. dollar. (Note that the further the euro depreciates, the more likely import price inflation will rise—an issue when headline CPI for the region showed a -0.1% YoY decline in September—far from the Bank’s 2% target.)

‘Lower for longer’ just makes real estate assets look that much more attractive on a relative yield basis.

*Benchmark rate: Rate charged by the ECB for credit; essentially, a two-week repurchase agreement.

**Deposit facility: Rate earned by banks that make overnight deposits with the ECB.

***Marginal lending facility: Rate charged for overnight credit from the ECB (made against the presentation of sufficient collateral.)

 

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Heidi Learner

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