Dovish Trichet to be expected.
Signals pause to tightening policy
Potential cut in deposit rate!
Lower staff forecasts – growth and inflation
No change to liquidity provision – ample liquidity provided until Jan’12
Deposit rate
The ECB might look to cut the deposit rate in an attempt to encourage more lending and increase liquidity in the Eurozone. Given the refi hike in July its highly unlikely that the ECB will cut its target rate so soon. So we see a good chance of a cut in the deposit rates and ultimately a widening of its rates corridor to 1.75%.
We have seen a large increase in the deposits placed at the ECB at 0.75% (current deposit rate). Concerns regarding peripheral Europe and credit quality at many European institutions has seen many banks choose to hold cash at the ECB rather than lending into the Interbank market. €151bn was placed at the ECB last weekend (largest placing since Aug’10).
However a cut in the deposit rate is not necessarily going to suddenly increase bank lending. Given the likelihood of a hard default by Greece in the coming months and the contagion that will follow, will banks be prepared to take the risk?
Flow – Huge bullish trades via options with 100k 99.00 Sep11 Euribor Calls purchased yesterday and in the last week.
HSBC Global Research