- All surveyed analysts expect the ECB to keep their three key interest rates unchanged
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A number of analysts have suggested that inflation rhetoric could be downbeat and further QE is a possibility later this year, as such any
potential indication to this by Draghi is likely to take centre stage at the press conference
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The central bank are said to be concerned by inflation expectations, with low energy prices and recent EUR strength raising concerns about the
central bank’s mandated 2% inflation target
In terms of the rate decision itself, the ECB are expected by all surveyed analysts to stand pat on their three k
ey rates (Refinancing 0.05%, Deposit -0.20% and Marginal Lending 0.30%) and
as such attention will reside with the accompanying press conference at 1330BST/0730CDT.
Last month’s press conference saw ECB’s Draghi say the ECB are to look through some of the volatility surrounding Greece and China and given events since
then, notably last week’s `Black Monday`, participants will be looking to see if the ECB is still willing to shrug off concerns around China as was the
case with BoE’s Carney over the weekend.
Inflation concerns have been a long term issue for the ECB, with EUR Eonia Forward 1Y/1Y remaining in negative territory and the EUR 5Y/5Y forward
inflation swap rate at similar levels to when ECB began their QE program at the beginning of March
. However, the recent volatility stemming from China has seen strength in the EUR due to its role as a funding currency and this has combined with low oil
prices to exacerbate the issue and dampen inflation expectations further. EUR has been particularly impacted by events in China, with CNY the largest
single currency in the EUR basket and as such, Monday’s August reading of CPI estimates remained depressed, coming in at 0.20%. As a consequence,
the ECB are expected by many to be downbeat on inflation forecasts, although with no survey or professional forecasts scheduled for release.
Analysts at Morgan Stanley suggest that the central bank may also be downbeat on GDP forecasts.
Some have suggested that an extension in terms of either size or duration of the central bank’s QE program is not out the realms of possibility,
despite ECB’s Constancio stating on Tuesday that the ECB will not be pushed into a knee-jerk reaction
. As a reminder, the ECB is less than a third of the way through their QE programme, which involves EUR 60bln of purchases per month until September 2016.
A number of analysts including those at Barclays, Goldman Sachs, Citi and JP Morgan all forecast that an extension is possible, however with the
general consensus being that an announcement at this press conference is doubtful.
If an announcement is not made by President Draghi,
participants will instead be looking out for a change in rhetoric, with analysts at Goldman Sachs suggesting that Draghi may strike a dovish tone,
however note that he will likely be vague in terms as to what new easing measures would look like.
Market Reaction
The Market reaction will likely depend on how dovish a stance ECB’s Draghi takes on inflation and the state of the economy. Markets will be looking out for
any comment on either the Eurozone economy, or the risks of a global slowdown given concerns regarding China. As mentioned above, a dovish stance could be
presented and comments could be made on the possibility of the extension of the current QE programme.
However, given ECB’s Constancio’s most recent comments regarding avoiding a knee jerk reaction, there is a possibility for a hawkish surprise whereby
Draghi could reiterate comments made at last month’s meeting and see the central bank look through recent volatility in China and the Eurozone, a scenario
that could likely be EUR positive as participants factor in the possibility of no further additional accommodation. If however Draghi does suggest the
possibility of further QE, then the suggestion of further bond purchases would naturally be supportive for fixed income products as well as for equities
and negative for EUR.