“Power to the Borrowers” – who are the winners from QE?

**Trends in official ECB and ST money market rates (%)**
Source: ECB; Haver, CMMP

The ECB is widely expected to cut its deposit rate next week and to announce a restart of its QE (bond purchase programme) from October.

**QE in action – scale (EUR mn) and breakdown by instrument**
Source: ECB; Haver, CMMP

Previous non-standards monetary policy measures – the expanded asset purchase programme (APP), the introduction of negative deposit rates and the targeted longer-term refinancing operations (TLTROs) – all contributed to a steady and widespread decline in bank lending rates while narrowing their dispersion across countries in the Euro Area (EA).

**Falling (real) cost of borrowing for EA households and corporates**
Source: ECB; Haver; CMMP

Since the announcement of the credit easing package in early June 2014, lending rates have declined significantly more than market reference rates and policy rates.

In the household (HH) sector, EA lending rates have fallen 134bp since May 2014 compared with a 25bp reduction in the Main Refinancing Rate (MRR) and a 69bp reduction in 3M EURIBOR.

The largest contraction in HH lending rates have been seen in Portugal (-201bp), France (-175bp), Italy (-164bp) and Belgium (-156bp).

**Shifting the balance or power: cost of borrowing for households and corporates has fallen faster than ST money market and official rates (change in bp since end May 2014)**
Source: ECB; Haver; CMMP

In the corporate (NFC) sector, EA lending rates have fallen 123bp over the same period, with relatively large contractions in Portugal (-320bp), Spain (-193bp), and Italy (-192bp).

These trends are entirely consistent with the stated goal of the ECB to “ensure that businesses and people should be able to borrow more and spend less to repay their debt.” They also represent a clear shift in the balance of power from lenders to borrowers.

**Shifting balance of power reflected in underperformance of SX7E (leading EA banks) versus SXXE**
Source: Haver; CMMP

With 2Q19 results showing the negative impact of these trends on EA banks’ profitability levels (volume growth insufficient to compensate for spread erosion) and with EA banks’ share prices underperforming and trading at discounts to their tangible book value, the key question this week is not will the ECB cut rates and/or restart QE, but will they introduce measure to compensate banks for the obvious negative side effects of negative interest rates.

Please note that the summary comments above are abstracts from more detailed analysis that is available separately.