The ECB will hold its regular monetary policy meeting this Thursday. We expect no change in the monetary policy parameters this time, after the ECB announced a broad easing package last March. Some of the measures announced, including the purchase of investment-grade non-bank corporate bonds and TLTRO II, have yet to be implemented. In that regard, the ECB will likely clarify the eligibility of assets for its purchasing program and the start date for TLTRO II. Finally, we expect the Governing Council to update its views on inflation and the outlook of the economy.
Our view of EURUSD depreciation remains firmly based on the relative underperformance of the euro area economy amid increasing concerns about EU stability.
While we forecast further recovery in euro area PMIs in April (released Friday), they will likely remain below January levels. Indeed, our economists think that any negative shocks reducing either the inflation or growth outlook will force the ECB to introduce additional easing measures.
The focus of any additional measures would likely be on quantitative and credit easing, with an extension of the asset purchase programme beyond March 2017 and possibly the inclusion of bank loan portfolios.
An additional rate cut of 10bp is likely only if the euro appreciates further, taking the depo rate to -50bp (a level we judge close to the floor).