In previous post the commonly held fallacy has been outlined. One might wonder, what is the real reason of the previous rate cuts. The answer lies in the realm of repurchase agreements – the means of financing bond purchase.

The insidious developments in Repo markets have been the main cause of rate cuts in June and August of this year. In both cases the Repo yield curve became inverted some time before ECB announced interest rate cut. After another round of interest rate downward revision the yield curve returned to “normal” state within the time span of week or two.

At this moment the yield curve is reversed yet again. Worse than that after the cut in August it never came to “normal” state. Provided this extraordinary state of debt financing it is highly probable that ECB will announce another bout of easing by either reducing rates by other 5 bp or by including new class of assets qualifying for its QE program.
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