ECB July 2019 Meeting Review – Draghi takes market on a ride

European Central bank(ECB) left its key interest rates unchanged at yesterday meeting and made dovish adjustments to the forward guidance and mentioned further easing measures. The part on examining options for rate tier structure and QE highlights that and the former will at least be a relief for banks as cuts are set to come in September.  ECB provided more than adequate indication that it is worried about growth and disinflationary forces. However, the sources of concerns stem more from external developments than local developments.Of note, there's a subtle tweak to the forward guidance with the ECB allowing for rate cuts now shifting from "rates at present levels at least through 1H 2020" to "rates at present or lower levels at least through 1H 2020".

We had given an outside chance of the ECB embarking on a rate cut in this policy meeting but expected it to stress that it would be ready to increase accommodation later on in 2019. In this regard, the ECB held back on lowering its policy rate but did provide several explicit indications to suggest that it is poised to support the economy further. Draghi however, waffled on a few points, describing the economy intermittently as "worse and worse" while saying there was no reason to be gloomy. He also said the Governing Council didn't even discuss a cut today.  

However, ECB statement stated that it was instructing the various committees of the Euro system to examine options to: 
(a) reinforce its forward guidance, 
(b) prepare mitigating measures such as a possible two tiered system* and 
(c) options for another QE program. 

*A two-tiered policy system could mean differential rates are charged at for required reserves and excess reserves. The main idea would be to not penalize banks for a negative interest rates by charging a lower rate on excess reserves so as to not crimp lending into the economy or bank profitability.     

Both Euro and bond yields across the Europe were slightly positioned for rate cuts - so there will be some position unwinding but overall the FX moves were limited. Weak economic indicators from Euro-zone and accommodative policy from US will keep Euro range bound between 1.10-1.14 till the next ECB meeting in September.

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