, 12 tweets, 4 min read Read on Twitter
#ECB thread

Here's what analysts are expecting:
1) Majority expect 10bps rate cut to -50bps (minority 20bps cut)
2) Tiering
3) Restart of Asset Purchases : sov +corp bonds of EUR 30bn x 12 months (risk of LESS given recent hawkish commentary)
4) Enhanced Fwd Guidance
1) rate cuts

The interest rate mkt is expecting 50% probability of a 20bp cut (or 15bps priced in for Sep) and another ~10bps in December, troughs at 34bps cuts next summer

Rate cut to 1/ target EUR & 2/ extra kicker for TLRO3 which starts in Sep 3/ stimulate credit demand
But whether stimulating credit demand leads to pick up in nominal growth is questionable-chart from Citi below

@LHSummers recently called negative interest rate policy 'black hole economics' because marginal positive is offset by counterproductive side effects incl misallocation
2) Tiering. Mkt pricing in more int rate cuts because the ECB have talked abt mitigating side effects of negative rates (benefits core banks)
Goldman Sachs estimate a -20bp cut could lower European Banks EPS by 6% (EUR 5.6bn)

BUT introducing Swiss style tiering cd mitigate 30%
The issue with tiering is that
1) banks excess reserves in Eurozone are not homogenous & mitigating effects would benefit core banks not periph banks, so tough to come up with a program one-size-fits-all
2) They can't over tier because it could push up the effective eonia rate
BUT it's equally tough to see how ECB can ease without introducing tiering and with the political pushback particularly out of the Germans

The Bild recently led with a headline : SAVE OUR SAVINGS

Banks paid >€20bn to ECB since negative deposit rates were first applied in 2014
3) Forward Guidance: Likely the ECB drop the calendar based contingency and opt for state dependent contingency reiterating that rates will stay at current levels (or lower) until well past the end of asset purchases...

which bring us to my last point..
4) Tone out of various ECB members has shifted in the run up to this meeting suggesting that the barrier for further asset purchases is a lot higher than thought previously

Most notably, De Galhau (who is more of a centrist) expressed caution about possibility of restarting QE
As such, asset purchases expectations have been revised downwards from a chunky package of ~ EUR 500bn to probably around EUR 30bn x 12 months now

Reminder: In Jan 2015 first QE announcement the total package size was EUR 1.1T

_+Other important consideration: Issuer limits
Technically:#ECB can keep buying bonds using current issuer limit constraints (33%) &that should get them to end of 2020,but if they want to send a more dovish signal to mkt, then the limits should be upped to 50% (?); implying that further stimulus could be achievable post 2020
However, they may be reluctant to raise the limits again as the German courts have RE-OPENED the case against bond buying

=> ECB have committed to a package. It will be difficult to satisfy the concerns of key stakeholders (incl core banks who have been VERY vocal against further cuts) as well as resistance to extra QE

#Draghi may well use his last magic wand to hammer home one word: FISCAL

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