FI Eye-opener: ECB deposit rate cut still on the table

Yesterday was fairly quite in the markets. Both equity and bonds markets seem to have stabilised a bit. No major data releases are due for some time and hence market direction could be a bit sideways in the very near term. US retail sales are due today and jobless claims too, but will hardly be big game changers. Focus on Riksbanken and Norges Bank today.

Poor industrial production data and Coeure mulling deposit rate cut

Friday’s GDP report from the Euro area is more interesting that usually after Mr Draghi mentioned it as one of the three pieces of new information that will be important for the rate decision in March, but should probably surprise a lot to change market expectations for the ECB. Yesterday’s industrial production numbers for December were poor and actually point to some downside risks to the GDP growth forecast.

ECB’s Coeure was reported to have said that a deposit rate cut remains a very likely option. The March decision is hardly taken already, but there are clearly dovish forces within the Governing Council that keeps the fire burning. The two criteria for actions in the near term are an unwarranted tightening of money markets and deteriorating medium term outlook for inflation. In February, however, the Governing Council opted to wait for more clarity and Mr Draghi specifically mentioned GDP numbers for Q4, inflation in February and the new staff projections.

The end of threshold guidance

Staying on the central bank topic, the Bank of England (BoE) scrapped forward guidance yesterday, or at least threshold-based forward guidance. The 7% unemployment rate threshold is likely to be hit very soon, but the BoE will not set new threshold, but rather focus on a broader set of factors in deciding when to start hiking rates. Mr Carney and his crew turned significantly more optimistic on growth and on the labour market supporting current market calls for the first rate hike in Spring 2014. Thus, rates moved higher and the GBP strengthened despite a fairly dovish message from Mr Carney accompanying the bullish staff projections and the end of forward guidance. See more here.

Scandi focus today

Riksbanken will most likely be on hold today and leave the repo rate path unchanged, in line with general expectations. We only expect minor adjustments to the Riksbank’s forecasts, although we see some downside risks to the inflation projection longer out.

Norges Bank Governor Olsen gives his annual address today. Yesterday’s GDP figures were stronger than expected and inflation too has come in higher than Norges Bank expectations. Information up to this point seems to be pointing towards an upward revision of the interest rate path in March.