Here is how global currency warfare and the global "race to debase" works: ECB cuts rates to -0.3%, the BOJ cuts to -0.1%, then the ECB cuts to -0.7% next. At least that's JPMorgan's most recent forecast, which now see Mario Draghi going full NIRPtard, and cutting the ECB's -0.3% deposit rate to -0.5% next month, and then to -0.7% in June, unleashing an epic deflationary tsunami around the globe, one which will send the USD soaring, will force more retaliation by the BOJ, will force more devaluation by the PBOC, will lead to more angry complaing by Deutsche Bank how easing is killing the bank, and so on.
When does it end? When fiat and modern neo-Keynesian economics are thoroughly discredited and when the world's central bankers end up with fast food worker jobs.
ECB to ease even more and cut the deposit rate to -0.7%
- We now expect the March package to include a larger deposit rate cut of 20bp, taking it to -0.5%
- We now expect another package after that, possibly as early as June
- We expect this second package to take the deposit rate to -0.7% and to extent QE until end-2017
- Our forecast change is motivated by risk management amidst low inflation, rather than a macro forecast change
Until now, our expectation has been that the ECB would announce another policy package in March, comprising a 10bp cut of the deposit rate to -0.4%, an increase in the monthly pace of QE purchases by €10bn to €70bn/month, a three-month extension of the QE programme to mid-2017 and two additional TLTROs during 2H16. Beyond that, we have not been expecting any further easing, but we have been expecting the ECB to maintain a very accommodative stance for a long time, with the first hike only towards the end of 2019.
Today, we are changing this call. First, we now expect the March package to include a larger deposit rate cut of 20bp, taking it to -0.5%. Our expectations for QE and the TLTROs are unchanged. Second, we now expect further easing, possibly as early as June, with another 20bp deposit rate cut to -0.7% and another six month extension of QE at €70bn/month, taking QE through to the end of 2017. It is possible that the ECB will adopt a tiered deposit rate system as soon as March. But, even if it does not, we would expect a clear signal already in March that it will be considered later on; for example, the Governing Council could task the ECB's technical committees to look into it. And in any case, we would expect the ECB to adopt a tiered system by the time it cuts the deposit rate to -0.7%. As we have argued before, the ECB would be sending a strong signal by adopting a tiered system, which can be designed in a way that minimises some potential side-effects.
This forecast change is motivated by two factors. First, we continue to think that inflation will rise towards the ECB’s target more slowly than its staff expects. Second, the ECB will be more sensitive to this in an environment of persistent downside risk. Hence, our new call is mainly about risk management, as we are not making any changes to our macro forecasts. Admittedly, GDP has grown at a sluggish pace in 2H15, but the underlying pace was likely firmer. And, while the January business surveys raise some concern about the underlying pace, we are not currently convinced that there has been a real change in underlying economic conditions. But, from an ECB perspective, uncertainty about the global economy has increased even further, while recent financial market developments are surely uncomfortable (e.g., in terms of the trade-weighted currency, inflation expectations, potential pressures on banks, etc).
Hence, even if the ECB staff publishes the new inflation forecast for 2018 in early March, which we think could be at 1.8%, we believe the Governing Council will remain nervous about the outlook and respond quickly to gradual disappointments on inflation.