Is The ECB About to Make a Mistake?

In addition, the ECB will likely lower interest rates on the standing facilities. We think the Council will cut the Main Refinancing Operations rate by five basis points (bps) to 0% and the Deposit Facility rate by 10 bps to -0.3%.

We see the risks to this forecast to be even more, rather than less, stimulus.

One possible risk to the broader economy of more stimulus is financial instability. High levels of monetary and funding liquidity provided by the ECB potentially beget a feedback loop that lowers market and asset price liquidity. This poses a dilemma as asset prices in the eurozone are already influenced by the ECB. But doing nothing is not an option. In our view, the ECB needs governments to enact and enforce fiscal and structural policies to complement its expansionary monetary policy. Without government contributing to growth, overreliance on monetary policy runs the risk of sowing the foundation of the next financial crisis. Yet, without more stimulus, the eurozone runs the risk of its challenges becoming more embedded, like they have in Japan.