ECB Sets Stage For September Rate Cut; Will Examine QE, Tiering In Pursuit Of Inflation Target

As expected, the ECB did not cut rates at today's rate cut, but in a move that was widely expected, the ECB did hint that rate cuts are coming, by adding the "or lower" language, when saying that "Governing Council expects the key ECB interest rates to remain at their present or lower levels at least through the first half of 2020."

Translation: a 10bps rate cut is now assured.

But wait, there was more, with the central bank noting the "need for a highly accommodative stance of monetary policy for a prolonged period of time, as inflation rates, both realised and projected, have been persistently below levels that are in line with its aim." As a result, the Governing Council noted that it was "determined to act, in line with its commitment to symmetry in the inflation aim. It therefore stands ready to adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner."

In other words, if the Fed is cutting the ECB will also be cutting, and since the Fed launched "symmetric" inflation targeting, i.e. overshooting inflation to the upside, so will the ECB (how it will get there is another matter entirely).

Finally, the ECB also hinted that QE may be coming as soon as September, noting that the Governing Council "has tasked the relevant Eurosystem Committees with examining options, including ways to reinforce its forward guidance on policy rates, mitigating measures, such as the design of a tiered system for reserve remuneration, and options for the size and composition of potential new net asset purchases."

As a reminder, earlier this week we noted an analysis from Goldman, explaining why cutting rates without tiering would be disastrous for European banks, which is why - lo and behold - Draghi (formerly of Goldman) announced just that - tiering is coming, which is good news for Europe's bank and is the reason why they have jumped on the news of even lower rates.

In short, the race to the currency bottom has arrived.

Full ECB statement below:

At today’s meeting the Governing Council of the European Central Bank (ECB) decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.40% respectively. The Governing Council expects the key ECB interest rates to remain at their present or lower levels at least through the first half of 2020, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to its aim over the medium term.

The Governing Council intends to continue reinvesting, in full, the principal payments from maturing securities purchased under the asset purchase programme for an extended period of time past the date when it starts raising the key ECB interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.

The Governing Council also underlined the need for a highly accommodative stance of monetary policy for a prolonged period of time, as inflation rates, both realised and projected, have been persistently below levels that are in line with its aim. Accordingly, if the medium-term inflation outlook continues to fall short of its aim, the Governing Council is determined to act, in line with its commitment to symmetry in the inflation aim. It therefore stands ready to adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner.

In this context, the Governing Council has tasked the relevant Eurosystem Committees with examining options, including ways to reinforce its forward guidance on policy rates, mitigating measures, such as the design of a tiered system for reserve remuneration, and options for the size and composition of potential new net asset purchases.

The President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 14:30 CET today.

And now we await Draghi's press conference in just over half an hour.