Next Week's ECB
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Resilient markets post Brexit will likely allow the ECB to stop at simply delivering hints of additional stimulus next week, reserving hard announcements for September.
This would coincide with the release of new inflation forecasts, which we think will continue to be inconsistent with a return to price stability within a reasonable policy horizon. We have no doubt that continuing QE beyond March 2017 is necessary. Beyond the flat inflation outlook, we think that financial stability and political stability risks in the periphery warrant continuous support from the central bank. At the same time we agree that negative yields in the long end of core probably are counterproductive.
This calls for a technical re-configuration of QE, with some liberties taken with the current implementation of the capital key. Upping the language from “close monitoring” to “vigilance” – using the old Trichet era code words – would be an easy way to “pre-sell” September, but we would not be surprised if Draghi chooses to be more blunt an simply states that “a revision of the stance is imminent”.
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