ECB Preview: A Cut is Not the Cure for COVID-19

• We plan to monitor closely next week’s ECB meeting following the outbreak of the COVID-19 virus and with the policy response space less than for other central banks. In our view, the ECB will have to be innovative to address this special situation. Contrary to market pricing, we do not expect the ECB to cut rates but rather to focus on liquidity facilities targeting small and medium-sized enterprises (SMEs), a tweak to the QE programme and potentially reintroducing its date-based forward guidance. However, it is important to stress that we see a significant risk of a 10bp cut at next week’s meeting.
• We expect the ECB to stand ready to ease monetary policy via rate cuts should the economic outlook deteriorate sharply in the near future. As such, we see the possibility of a rate cut in Q2, perhaps as early as the 30 April meeting.
• We expect the new ECB staff projections to lead to lower GDP growth and broadly unchanged inflation projections. However, with the limited amount of data released taking into account the COVID-19 effect, we believe markets will focus on the narrative rather than the projections.
• From a risk-reward perspective, we recommend paying the EONIA 2Y1Y for a positioning into Q2 and paying Mar20 EONIA heading into the ECB meeting next week.

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