ECB minutes: Early depo rate hike still on the cards, Barclays says

The minutes of the European Central Bank's last policy meeting showed that a change in rates is not imminent, but some economists still believe the deposit rate will head higher sooner than most expect.

The possibility that traders might have been too hasty in pricing-in a cut to the ECB's deposit rate was first flagged to markets on 3 April, when ECB chief economist Peter Praet told Spanish daily Expansion that that rate (now well in negative territory) was the anchor for the entire risk-free interest rate curve and that the monetary authority did not wish that to move higher at present.

Praet repeated that stance in a speech on Thursday morning, with ECB chief Mario Draghi himself sounding a cautious note alongside him.

But some economists were somewhat unconvinced, pointing to an apparently widening split between the members of the Governing Council as per their reading of the details of the minutes.

The ECB, like some rate-setters at the Bank of England, were focused on wages and whether or not they would head higher as inflation rose, although there are important differences in the structure of both economies. In Europe, wages are often indexed to inflation, while in more flexible economies the empirical evidence is that they tend to track trends in labour productivity.

Complicating the ECB's task further, some of the euro area's economies were at different points of the economic cycle and some also differed in their exact structure.

So what compromise solution might the ECB's GC find to bridge that widening gap in its own ranks? A hike in the deposit rate before asset purchases were completely wound-up, Philippe Gudin, Francois Cabau and Antonio Garcia Pascual from Barclays said.

"We therefore continue to expect a rebalancing of the forward guidance to be announced at the June meeting (or even possibly in April), and we forecast a reduction in the pace of the APP in 2018, together with a very gradual and modest increase in the depo rate (20bps altogether in 2018)," the three analysts concluded.

Yes, if the economy continued to accelerate and core inflation rose then discussing an 'exit' strategy "would become warranted in future" the minutes, which were released at half past noon on Thursday, revealed.

However, the Governing Council was widely of the view that buying financial assets until at least the end of 2017, followed by a tapering of those purchases thereafter and a rate increase at some point well after that was still the best option.

"The view was widely shared that patience and maintaining a steady hand remained warranted at the current meeting, coupled with a more confident tone on the underlying economic conditions in the euro area and a reduced sense of urgency for further policy action.

"This entailed keeping the ECB’s policy rates unchanged, as well as confirming both the intended pace and horizon of APP purchases and the Governing Council’s forward guidance on policy rates and the APP," the minutes read.

Speaking on Thursday morning in Frankfurt, Draghi echoed that stance, saying it was too soon to declare success in meeting the ECB's goal for inflation, adding that there was yet no reason to reassess monetary policy.

"Before making any alterations to the components of our stance - interest rates, asset purchases and forward guidance - we still need to build sufficient confidence that inflation will indeed converge to our aim over a medium-term horizon, and will remain there even in less supportive monetary policy conditions," he said.

For Jennifer McKeown, chief European economist at Capital Economics on the other hand, the minutes pointed to interest rates in the euro area most likely not going anywhere before 2019.

Dr. Howard Archer, chief European+UK economist at IHS Markit was of a broadly similar view, saying: "If there are no political earthquakes in the French elections (in April/May), it looks very possible that the ECB could drop the reference to lower interest rates in its forward guidance at its June meeting.

"It looks likely that the ECB will start the process of gradually normalising interest rates in the latter months of 2018, starting with a lifting of the deposit rate from -0.40%. The first increase in its refinancing rate (currently 0.00%) could come just before the end of 2018."