News

The ECB unexpectedly cut its main refinancing rate by 10bps to 0.05%. The benchmark deposit rate was also reduced by 10bps to -0.2%, the second move deeper into the negative territory after its previous rate cut three months ago. (Figure #2). Only 6 out of 57 economists surveyed by Bloomberg predicted the rate cut.

The ECB also announced a plan to purchase assetbacked securities (ABS) and residential mortgage-backed securities (RMBS). Details of the new bond-buying programmes will only be revealed after the next ECB meeting on 2 Oct 2014. The ECB will only buy less risky senior securitized debts and mezzanine tranches with government guarantee. Size of intended ABS purchase was not revealed. However, Reuters reported that the size of ABS purchase could amount to €500bn (US$656bn), a size equivalent to QE2 of the US Fed.

The ECB president Draghi said growth outlook in the Euro area has recently weakened with 2Q14 GDP staying flat qoq basis. The ECB has downgraded its Euro zone growth forecast for 2014 and 2015 to to 0.9% and 1.6% respectively (IMF: 1.1% & 1.5% respectively).

Comments

The rationales for the further rate cut and bond-purchase programme are to (i) stimulate credit extension to the real economy; and (ii) safeguard economic outlook from dipping back into recession. In addition, the CPI growth in the Euro zone has weakened to only 0.3% yoy in Aug-14 (Figure #3), the lowest since Nov-2009.

Loan and money supply growth in the Euro zone have remained subdued in recent months despite the rate cut in June with lending measures. M3 growth remained modest at 1.8% yoy in Jul-14 (Figure #4).

Forcing the ECB deposit rate to deeper negative territory is expected to weaken the EUR, which theoretically will make Euro zone’s exports more competitive.

On the macro front, the divergence between monetary policy stance among major economies (i.e. Fed already on tapering action) is expected to bring more financial market volatility. On the positive side, the ECB’s latest action signals its willingness to “do whatever it can” to safeguard the economic recovery besides providing more liquidity globally, which is favourable for all asset classes.

For Malaysia, we maintain our growth forecast of 6.0% for this year, with projected 2H GDP growth slowing to 5.6% from 6.3% in 1H, largely due to higher base a year ago and diminishing net export boost.

With the unexpected dovish move by the ECB, the probability of an OPR hike during Sep MPC meeting (18/09) is now further reduced. Notwithstanding a firmer US growth outlook, external environment had generally turned weaker in August, reinforced by the more moderate domestic loan activity in July. The upcoming July trade and IPI data could provide clue on the degree of GDP growth tapering into 2H, an influential factor for decision on OPR stance two weeks later.

Source:Hong Leong Investment Bank Research - 5 Sep 2014