JPM
We expect the ECB to quickly express its commitment to ensure price stability in the region, which necessitates a commitment to the integrity of the region. The ECB’s actual policy response to this shock will depend on the extent of the impact on growth and inflation, and on the extent to which financial market stress looks likely to weigh further on spending and increase sovereign and bank funding costs.
We now expect more easing on rates and the balance sheet. Our forecast already anticipated further easing in September, in the form of an extension of the current asset purchase program through end-2017 (an increase in asset purchases worth €720bn). We now expect additional easing involving a 10bp cut in the deposit rate (to -50bp) and a further extension of asset purchases into 2018 (adding a further €480bn of asset purchases). We do not expect these additional moves to come quickly, unless financial markets put the ECB under a lot of pressure. If peripheral financial market pressure is intense enough to threaten the integrity of the region, the ECB could introduce a new instrument to limit contagion. This could involve country-specific bond market intervention (like the OMT) but without conditionality. In our view, the ECB would rather introduce a new instrument to limit peripheral stress than divert purchases from the existing asset purchase program. Regarding potential bank funding pressure, banks already have access to unlimited liquidity in the weekly and three-monthly operations. If needed, the ECB could adjust the timing of these operations