Divyang Shah, Senior IFR Strategist
This is much more specific than its previous forward guidance that simply reflected the accommodative nature of monetary policy. The fact that the decision on forward guidance was unanimous is another positive as it reflects the fact that all of the ECB are on the same page with regards to the need to maintain current stimulus even if they differ on whether further stimulus is required.
The question is what does “extended period” mean? A lack of clarity on this is likely to dampen the impact of forward guidance but by linking the market rate expectations to the real economy the ECB can create some positive feedbacks and allow market expectations to adjust.
The impact of forward guidance can be seen on the EONIA curve as the whole curve flattens with 12x24 down 13bps to 0.23%. We had a receive 12x24 EONIA on at 0.45% and we will look to take profit on this at current levels for a paper profit of 22bp.
Forward guidance/extended period
On top of delivering forward guidance we now have Draghi backing up the language with the ECB having a extensive discussion about a possible rate cut.
Draghi is also making sure that the emphasis is on “key rates”, which means that they are not ruling out the possibility of a negative deposit rate or even the refi rate being at a floor of 0.50%.
The addition of “or lower” in the forward guidance is intended to allow an asymmetry which helps to cement the forward guidance even if there is uncertainty as to what “extended period” means.
