While ECB President Mario Draghi may sound slightly hawkish at tomorrow’s press conference after an unexpectedly strong acceleration in CPI in December and European economic growth modestly picking up, the ECB is set to argue on Thursday that its extra-easy policy stance is still needed to keep the recovery on course. As a result, it is all but certain to leave current monetary policy in place and maintain a promise for lengthy stimulus, having extended its bond-buying program just last month coupled with the tapering (just don’t call it a taper) of its bond purchases this year.
ECB President Mario Draghi can argue the bank has done its part to mend growth, but he will also note the recovery is not self-sustaining, underlying inflation is weak and political risk from key elections weighs on the outlook. So turning down the ECB taps now is inappropriate, he is expected to say.
According to Reuters, on the face of it, Draghi should be relaxed. Inflation hit a three year high of 1.1% last month (the ECB expects it to hit 1.7% in 2019), manufacturing activity is accelerating and confidence indicators are firming, all pointing to solid growth at the end of last year. Additionally, euro zone business growth was the fastest in more than five years in December, order books are surging on export demand, and consumption is holding up, despite rising energy costs, all pointing to the sort of resilience not seen since before the bloc’s debt crisis. Of course, it could all be transitory as the “Trump” effect shifts to Europe, but the answr won’t be known for a few more months.
So what does Wall Street expect? According to a Bloomberg survey, the ECB will wait until at least its meeting on Sept. 7 to announce any new policy measures As a result, Bofa strategists expect Draghi to sound “as dull as possible” to keep the message sent at the previous meeting intact. Confirming this, ECB’s Yves Mersch said on Jan. 6 that improving euro-area economic numbers and a faster-than-forecast inflation pickup aren’t enough to warrant an immediate shift in the policy.
Here is a summary breakdown of select outlooks:
BofAML (Athanasios Vamvakidis, Gilles Moec)
- Draghi will endeavor to be as dull as possible, so as not to generate too many expectations on any further change in stance any time soon
- Any deviation from the December message on the inflation outlook and/or further delay in the implementation of the new QE parameters would create scope for bonds to underperform current forwards
- Risk for euro small and balanced; any hawkish statements that strengthen the euro during the Q&A could be an opportunity to sell EUR/USD again
JPMorgan (strategists including Fabio Bassi)
- Don’t expect the ECB meeting to break much new ground; ECB will likely express satisfaction at the improvements in the growth and inflation outlook, at the same time stressing that there is no reason to think about tapering more quickly than the Dec. announcement
NatWest Markets (Anna Tokar, Giles Gale)
- Unlikely to give significant new clues to the ECB’s reaction function
- Since the Dec. meeting, data has been solid; expect the Council’s economic assessment may be slightly more optimistic, in line with the assessment of the Eurozone growth outlook
- However, policy debate should be unchanged and simply reference the decisions taken in Dec
Citi (strategists including Harvinder Sian)
- Meeting is too close to the policy moves enacted last month to warrant a material shift in ECB tone, even if data has been more buoyant than expected
- Any change to the reference of growth risks being to the downside will have to await more data and perhaps even clarity on the new U.S. administration’s policies
- Think that any further tapering risk starts from June meetings onwards, but the rise in oil prices and a drop in euro could see markets re-price from the March staff forecasts
- Expect some focus on the 33% issue limit, with Draghi likely to repeat that there are legal issues in up- sizing the issuer limit on legal grounds; many investors don’t believe the limit is a hard line in the sand –- despite the fact Portuguese and Irish bond valuations already reflect a less supportive ECB backdrop
UniCredit (economist Marco Valli)
- ECB President Draghi will sound constructive, but dovish
- He will probably acknowledge that risks in the short term are moving toward faster-than-expected headline inflation and more balanced growth assessment
- Also expects Draghi to emphasize that uncertainty remains elevated and the medium-term outlook hasn’t changed much from last month
- ECB still wants financial conditions to remain very loose
Deutsche Bank (strategists including Francis Yared)
- Next step for the ECB should be to shift to a neutral stance by removing reference that rates may go lower in the introductory statement; may be too early to do so in Jan. meeting, but the overall tone of the press conference should suggest that the policy stance is evolving in that direction
ING (Carsten Brzeski)
- The December decision has put the ECB on autopilot at least until the summer and until after the Dutch and French elections. This autopilot should also immunize the ECB against short-term volatility in macro data.
Commerzbank
- The lending channel is no longer clogged up, but it is not completely free either and progress has only been possible thanks to massive measures by the ECB. If monetary policy were to be tightened again, and the burdens from existing loans were to increase once more, the lending channel would close and the economic picture would worsen considerably again.
