Forex Flash: ECB may reduce haircuts on collateral in June – TD Securities

FXstreet.com (Barcelona) - TD Securities analysts expect the ECB to cut its refi rate by 25 bp (55-60% chances) in May, but the June decision will likely remain data dependent: “If commodity prices remain where they are and the survey’s and hard data disappoint further, it would be likely we would have yet another downward revision to staff forecasts in June”, wrote analyst Jacqui Douglas, expecting a further cut in the refi rate, narrowing the corridor to below its crisis lows (it was 50bps in either direction of the refi rate for a period in 08-09), or even negative deposit rates.

“While the ECB is debating the merits and composition of some kind of FLS-esque program for the Eurozone, it doesn’t have a lot of options for something that might be a) effective, and b) legal and within its mandate, or c) meaningfully different from what is already available in the standard LTROs”, Douglas continued, adding that the easiest option to increase credit into the Eurosystem is simply to cut the haircuts on collateral to the ECB, which they could justify on the improved market dynamics and credit conditions. “This option of reducing haircuts is looking increasingly likely for the June meeting. We’ve already seen a few ECB members (including Weidmann during last week’s infamous WSJ interview) come out and say that supporting SME credit is not really within its mandate, and can be more effectively accomplished by other entities like the EIB”, wrote the analyst.