ECB Preview: 10 Major Banks Expectations from June Meet
As we head towards the ECB’s June meeting, following are the expectations as forecasted by the economists and researchers of 10 major banks.
Surprisingly all the 10 major banks are expecting, the meeting to be a non-event and expects little in the way of euro volatility. All eyes should be on the ECB staff’s inflation projections, further details on the ECB’s corporate bond purchasing programme and Mario Draghi’s attempt to strike a fine balance between optimism and caution
We expect the ECB to maintain its patient stance at the meeting this week and not send any new signals about more easing. The ECB will publish updated growth and inflation forecasts at the meeting this week. We look for an upward revision to the ECB’s projection for headline inflation in 2016-17 due to the higher oil and food prices, but the core inflation forecast will in our view be revised lower over the entire forecast horizon. Notably, the ECB might revise its 2018 inflation forecast lower. From a market perspective, expectations are very low with a zero probability of a 10bp deposit rate cut at the upcoming meeting. We stick to our view that the ECB will remain side-lined in the global currency war and not cut policy rates further.
The ECB meets this afternoon in Vienna with this meeting also incorporating an update of ECB projections. The meeting today is going to be a bit of a non-event and we expect little in the way of euro volatility. The focus really will be on the updated forecasts for real GDP growth and inflation. Here, there may well be some good news for the ECB with a reasonable chance of a very slight upward revision to the inflation forecasts. So the general tone of today’s press conference may be cautiously upbeat with President Draghi again emphasising the view that the monetary policy stance of the ECB is working to support growth. Given the ECB will be in such a position today and given there is no pressure on the ECB for further action at present, President Draghi may well take the opportunity to up the pressure on euro-zone governments to do more. Certainly in regard to investment spending, the ECB must surely believe that Germany could be doing more.
All eyes should be on the ECB staff’s inflation projections, further details on the ECB’s corporate bond purchasing programme and Mario Draghi’s attempt to strike a fine balance between optimism and caution. Political developments like Brexit fears and a rather general emergence of populist parties could easily limit the potential for upside surprises. In sum, we expect the ECB to stick to its very cautious take on the Eurozone economy. Higher oil prices should lead to the first upward revision of ECB staff’s inflation forecasts since the start of QE in early 2015. Such a revision looks even more likely, given the strong growth performance in the first quarter and the renewed weakening of the euro exchange rate.
We do not expect the ECB to change its policy stance on Thursday. The ECB is unlikely to implement additional measures so long as there are still previous decisions pending full implementation – i.e. the first TLTRO-II allotment, due on 24 June, and the start of corporate bond purchases (CSPP). Thursday’s press conference may well be an uneventful meeting, there is still plenty of event risk ahead. This by itself should be sufficient for the ECB to maintain a ‘dovish’ stance.
At its June meeting, we expect little from the ECB; however, there is potential for inflation projection revisions to be quite large, which would send an important signal on the ECB’s future monetary stance. We think investors should carefully gauge the new projections against their potential upper bound to get a real sense of where the ECB is heading – risks of higher real yields are not negligible. There are several factors contributing to a revision in the ECB staff’s projections in June. The most apparent is owing to the new level of oil prices and commodity prices in general. Our measure of global prices (see Inflation Insights - Think global, act global) has sharply increased in the past two weeks.
The ECB meeting will be interesting for the press conference, but there is very little chance of new policies being enacted. Rather, implementation of the previous announcements (TLTRO 2, bond-buying) and Greece will be key topics. At some point, pressure to taper bond purchases will start to be heard, but not until headline and core CPI measures are higher than today. EUR/USD continues to trade its narrow range.
There is no tension over ECB’s policy settings at today’s meeting, with no serious prospect of change for some months. But President Draghi’s press conference always has potential to move EUR. Draghi is likely to strike a wait and see tone and may even have some flashes of optimism given that fresh ECB staff projections are likely to show some upward revisions to 2016 and 2017 inflation, albeit energy-driven. Overall, the risks seem to be for some EUR short-covering.
We are not expecting any major announcements at today’s ECB meeting. In the six weeks since the last meeting, a number of GovCo speakers have reiterated President Draghi’s line from the last meeting that patience is need to give the ECB’s measures time to have an effect. And with two major elements of the March package (corporate bond purchases and the TLTROII) being rolled out in June, we expect the emphasis to remain firmly on the implementation and assessment of what has already been announced.
With the TLTRO and the corporate bond buying program yet to be launched, there is no expectation for fresh policy moves. The two main points of interest will be from the staff forecasts and whether the ECB decides to accept Greek bonds as collateral again now that the troubled country has passed its first review (of the third assistance package). Despite the strong Q1 GDP, the staff may shave the growth forecasts. Inflation forecasts seem less likely to be revised lower.
There are 80% chances that there will be no major messages or phrasing that need to change relative to the ECB’s April statement. Forward guidance is left unchanged and they reiterate the focus on implementing the March details. 2016 inflation is revised up to 0.4%-ish, while 2017 inflation is nudged up 0.1pp at most. Draghi should reiterate the focus on implementing the measures agreed to in March (IG credit purchases, TLTRO II). He will likely keep to his refrain that the ECB will do more if needed, but he repeats his March message that the GC does not anticipate having to cut rates further under the current projection. He mentions Greek debt buying w/ IMF sign-off.