ECB Preview: 7 Major Banks Expectations from ECB’s April Meet
As we head towards the ECB’s April meeting, following are the
expectations as forecasted by the economists and researchers of 7 major
banks. After last meeting’s package of measures and negative rates, all
the 7 major banks are expecting ECB to remain on the side lines with
the major focus on Draghi’s press conference wherein he can add some
further detail to the TLTRO-II programme, or the corporate debt
The majority of the additional easing measures announced in March is not yet in effect. While there are still measures pending implementation, we do not expect the ECB to come up with any new stimulus. Draghi may use the press conference to add some further detail to the TLTRO-II programme, or the corporate debt purchases.
After months of excitement and two new attempts by the ECB to revive the Eurozone economy, today’s ECB meeting should be light on new action. The stronger euro will also keep any acceleration of inflation at bay, providing the ECB with ample room to justify its loose monetary policy stance. We expect the ECB to send a dovish signal, stressing the downside risks to the economic outlook and reconfirming the ECB’s willingness to do more if needed. In the absence of any new policy measures, most attention at the press conference will very likely be on the recent war of words, with many German observers, so-called experts and politicians having started a new round of verbal attacks on the ECB and its current monetary policy stance. In our view, the ECB will try to keep a very matter-of-fact tone in this debate but will remain very tough on the content, probably referring to Article 130 of the Treaties, which is very clear on the ECB’s independence. The only tangible from today’s ECB meeting should be details on the corporate bond-buying programme. However, given the recent war of words from Germany against the ECB, the press conference should be anything but boring. Expect an ECB meeting that is light on action but heavy on words.
After the ECB announced a comprehensive package of new easing measures at their last meeting, it is likely that today’s meeting will be just a holding operation as the ECB continues to assess the initial impact from the new easing announcements. It is likely that President Draghi will continue to talk up the potential effectiveness of their new easing measures to help support the euro-zone economy and return inflation back towards their target. President Draghi may even take a more defensive tone following recent criticism of the ECB’s easing measures by German politicians. He is likely to reiterate that the ECB would implement further easing measures if required although emphasize that the ECB does not judge it necessary at present. The ECB signalled at their last meeting that they are less in favour now of lowering rates further into negative territory although did not completely rule it out. It prompted euro-zone short rates and the euro to rise following their last meeting. Short rates have since partially reversed the move higher. We expect President Draghi to reiterate the same negative rate message but it should have less impact today.
We expect a dovish tone from Draghi at the ECB meeting this week, but no new measures. Despite the comprehensive package of easing, which was announced in March, the ECB is still under pressure to ease again as inflation expectations remain around a historically low level, while the effective euro has strengthened following the easing from the ECB. We believe Draghi will re-open the door for additional rate cuts after stating at the latest meeting in March that he did not anticipate more rate cuts. Draghi is likely to do this by emphasising the ECB’s forward guidance stating that policy rates are expected to ‘remain at present or lower levels for an extended period of time’. A renewed focus on cutting policy rates should not be a big market surprise, as the ECB minutes revealed that ‘the Governing Council would not rule out future cuts in policy rates, as new shocks could change the outlook for inflation’. Generally, market expectations ahead of this ECB meeting are not very high, but looking further ahead additional rate cuts are priced in with a probability around 50% in September. Further details about the TLTRO II loans will also be in focus. In particular, more information about the lending benchmark, which determines whether the lending rate will be positive or negative, will attract attention.
The ECB is unlikely to offer any major policy changes at its meeting so we see a rather boring meeting with EURUSD more likely to eke slightly higher through the meeting. They’ll reiterate that they remain ready to act if inflation expectations become further de-anchored, and will reassure that much of the impact on the economy from past easing remains to be felt, but the focus will be on them already busy implementing the decision from March rather than any need to innovate further now. The only small risks are that we get further details on the IG credit purchases planned to begin later in Q2 (EUR+) or more discussion from Draghi on how far out any idea of tightening might be or how tolerant they may be eventually of upside inflation.
In Europe, the ECB Governing Council meets on monetary policy and there is little chance of a change in policy. It seems far too early to judge the impact from the most recent easing measures, but Draghi will likely point to the improvement in credit conditions post decision, although he will likely have to field a barrage of questions on why the Euro has appreciated since its last announcement.
It is unreasonable to expect the ECB to take fresh policy initiatives. Last month it announced several new measures, and all of them have not been implemented. Details on the corporate bond purchases and, possibly the new TLTROs, are expected. Given size and liquidity considerations of the corporate bond market and individual issues, most estimates appear to gravitate around 10-15 bln euros of corporate bond purchases a month. We expect Draghi to offer a robust defense of ECB's actions. He will point to some positive developments due to the central bank's policy initiatives. Draghi will suggest that the critics do not have a more compelling strategy to reach the mandated inflation target. Doing nothing is not an option.