We believe ECB’s more dovish tone in June is insufficient to stimulate the economy. As expected, ECB extended the timing that the historically- low interest would remain. It also released the pricing of the TLTRO-III. We were slightly disappointed that the interest rates offered was higher than those in the previous operations. The updated staff economic projections contain little change from those in March. While GDP growth and inflation for this year were revised slightly higher, the staff downgraded the forecasts for 2020.

At the press conference, President Mario Draghi stressed that downside risks have “gained importance” and the members take the problems of weak inflation expectations “seriously”. He also suggested that the members have “the readiness to act in case of adverse contingencies”. In fact, “several members raised the possibility of further rate cuts”, while others ‘raised the possibility of restarting the asset purchase program”.

The euro jumped after the announcement. ECB sounded more dovish but it is not yet ready to act more. It might have poured cold water to those who had priced in 50% chance of rate cut by end-2019. Yet, as economies of both Eurozone and the world slow further, ECB would have to hint further stimulus measures– cutting policy rate and/ or restarting QE, towards the end of this year.

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Forward Guidance

As expected, ECB extended the forward guidance in keeping the policy rates at current low levels. It expects them to remain at their present levels “at least through the first half of 2020”. The reinvestment of QE proceeds and interests remains in progress. This came largely in line with our expectations.

Economic Projections

Only minor changes were made. GDP growth forecast for this year was revised up to +1.2% y/y, from March’s projection of +1.1%. Estimates for both 2020 and 2021 are revised lower to +1.4%, from +1.6% and +1.5% respectively. On inflation, headline HICP was revised higher to +1.3% y/y for this year, from +1.2%. The forecast for 2020 is ticked down to +1.4%, from 1.5%. Core inflation is expected to reach +1.1% in this year (March: +1.2%), before recovering to +1.4% in 2020 (unchanged from March) and +1.6% in 2021(unchanged from March). ECB forecasts better employment market throughout the forecast period. It expects the unemployment rate to drop to 7.7% in 2019, before falling further to 7.5% and +7.3% in 2020 and 2021 respectively. All three estimates came in lower than those in March.

TLTRO-III Pricing

ECB released technical details of the new lending operations- TLTRO-III. The interest rate in each operation will be set “at a level that is 10 bps above” the main refi-rate. The interest rate for banks whose eligible net lending exceeds a benchmark would be 10 bps above the deposit rate of -0.4%. These were a bit higher than the TLTRO-II in 2016, of which the interest rates were the main refi-rate and deposit rate, respectively. News about the tiered rate system was lacking. This might signal that market expectations of further ECB rate cut could be overextended.

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