ECB likely to cut deposit rate by 10bp in September meeting; prepares new stimulus: says Rabobank

Finally, the speculation that Lagarde might lose her ECB nomination should Von der Leyen have failed to cross the line can also be put to rest, even though the European Parliament still has to official confirm her as ECB president. Given her background as a lawyer, as French finance minister and as IMF Managing Director, she does not have a very outspoken view on monetary policy yet.

But it seems fair to assume that her appointment will mean a continuation of the very dovish stance by the ECB under Draghi; at the very least her appointment has taken away any concerns in the market that the ECB would take a more hawkish direction under the new presidency, according to a recent research report from Rabobank.

And part of this new dovish policy framework will probably be ready for, and handed down to, Ms. Lagarde when she assumes office. At last week’s ECB meeting, the Council primed the market for new stimulus as early as September.

The ECB’s new forward guidance now explicitly indicates that rates could be lowered, all but confirming the market’s (and our) expectations of an imminent rate cut. Furthermore, the ECB staff is examining options to potentially restart asset purchases, the report added.

Nonetheless, President Draghi was reluctant to commit to anything during the press conference, leaving all options on the table. This despite Draghi striking a combative tone against the current low inflation and declining expectations. That was the main message of the meeting: the Council is “not happy” with this inflation backdrop, and the ECB is determined to act against it.

Perhaps Draghi didn’t double down on the dovish statement to avoid raising even more expectations in the market. Or perhaps it was because the Council is united about the need for easing, but still divided about the composition of this stimulus. Indeed, while Reuters sources called bond purchases “likely”, Bloomberg reported that “some officials questioned the effectiveness of purchases”.

"We still think a 10bp deposit rate cut in September is all but a done deal, and it probably will not be the last time the ECB lowers the deposit facility rate. To our minds the lower bound remains around -80bp. The OIS curve currently still prices in only two rate cuts of 10bp each, which means that the market expects the deposit rate to decline to -60bp in the next 12 months. Additionally, we believe that the odds of new asset purchases alongside rate cuts have increased substantially," Rabobank further commented in the report.