What To Expect From The ECB

Submitted by RanSquawk

ECB Monetary Policy Decision Due At 12:45 GMT, 13:45 CET, 07:45 EDT, On Thursday 14th December 2017, Press Conference Due At 13:30 GMT, 14:30 CET, 08:30 EDT

  • Unanimous expectations look for the ECB to leave its three key rates unchanged.
  •  As a reminder October’s announcement revealed that the Bank will be trimming its asset purchase programme to EUR 30bln per month from January.
  •  Focus will fall on the forward guidance, any details on the composition of the Bank’s APP in 2018 & the updated macroeconomic projections (with particular interest in the initial 2020 inflation estimate).

The European Central Bank (ECB) will issue its latest monetary policy decision on Thursday, unanimous expectations look for the Bank to stand pat and leave its three major interest rates unchanged (deposit facility rate -0.40%, main refinancing rate 0.00% marginal lending rate 0.25%).

To recap, the ECB confirmed in October that it will halve its asset-purchase programme to EUR 30bln per month from January 2018, until “at least September 2018,” although we still await the details of the composition of the Bank’s asset purchases in 2018.

As ever, the Bank’s forward guidance will be scrutinised, especially in lieu of hints of internal divisions over the (open-ended) nature of forward guidance adopted at last month’s decision. Various newswire “sources pieces” have identified Coeure, Weidmann, Lautenschaleger, Villeroy, Knot and Hannson as (hawkish) dissenters from within the Governing Council.

These stories have suggested that these policymakers would have preferred an explicit end-date for the asset purchase programme (close-ended). The division was also made apparent in the minutes of the latest meeting, which revealed that “keeping QE open-ended had broad support but a few policymakers wanted a clear end-date.” The minutes also stated that “some officials worried that a firm end of QE might result in tightening,” reaffirming that the doves remain in power (at present) within the governing council.

The consensus view looks for the ECB to reiterate its pledge to maintain rates at present levels “well past” the horizon of QE, with most expecting a tweaking of the Bank’s language through 2018.

Focus will also fall on the Bank’s economic projections (September’s projections are available here).

BofA Merrill Lynch reminds us that “a number of Governing Council members have hinted at an upward revision in the ECB’s forecasts in December, drawing on the strong momentum in the data,” although the bank notes that “the inflation scenario will be complex.”

It is worth noting that the recent preliminary November core CPI release eased to 0.9%, throwing another spanner in to the works. The focal point of the forecasts could well be the 2020 inflation projections (the first time that year will make it into the estimates). Deutsche Bank expects the “core inflation forecast for 2020 to be 1.6/1.7%, in line with the slow exit path announced in October.” While HSBC suggests that “the main news since September is a higher oil price (up around 20%), which we expect will raise the ECB’s 2018 inflation forecast from 1.2% to 1.5% add 0.1% to its 2019 projection. It will also publish a 2020 forecast for the first time, which we expect to be 1.8% and therefore close to, but less than, 2% and consistent with the ECB’s aim. Growth may be nudged up by 0.1% in 2017 and 2018, reflecting ongoing strength in leading indicators since September.”

It is also worth noting that the Bank’s economic projections assumed a EURUSD rate of 1.18.

BAML suggests that “the December press conference does not need to be particularly tricky. However, fairly quickly in 2018 the Governing Council may face some uncomfortable moments as we expect only a marginal acceleration in core inflation next year (20 bps).”

Some have suggested that tighter FOMC policy coupled with US tax reform/infrastructure investment in 2018 could lead to an appreciation in the USD and result in a currency-related boost for Eurozone inflation, although the generally positive news flow surrounding those matters hasn’t really weighed on the single currency in recent weeks.

In terms of market fallout, Nordea suggests that “while we do not expect any big market reaction following the ECB’s message, risks are tilted towards a slightly hawkish interpretation of Draghi.”

What The Bank Desks Are Saying: –

BofA Merrill Lynch: Some members have been quite vocal over the last six weeks – laying the ground for some changes in language – and Draghi won’t likely escape pointed questions on the central bank’s level of comfort with its stance and market pricing. In any case, next week a new batch of forecasts will be released, which would require some attention anyway.  We do not expect any change of language next week – we think we will have to wait until next spring for that – and we believe the ECB will send a message of confidence in its own stance with an inflation forecast for 2020 consistent with its target.

Barclays: After the decisions announced in October to extend QE until September 2018 at a reduced pace of €30bn per month, we do not expect any change in monetary policy nor in the forward guidance at the December meeting. The ECB will unveil its new macroeconomic projections and extend them until 2020; during the Q&A, President Draghi will likely be questioned about the dissenting views expressed at the October meeting as reflected in the minutes.

Danske Bank: Following the decision to extend the QE programme for another nine months in 2018, we do not expect the ECB to make any changes to its policy stance at its upcoming meeting. Instead, we think policymakers will put off any substantial discussion about the next move or changes to the forward guidance until well into 2018. Activity indicators have remained strong and we expect the ECB to revise its growth and inflation forecasts upward in light of the ongoing strong economic momentum. Consensus seems to be growing in the Governing Council that the October QE extension was the last one, as the ECB is increasingly shifting towards a more holistic view of the economy and inflation. Based on this, we think it is important to watch developments in ‘super core’ inflation. Other topics that could come up during the Q&A include the recent volatility in the Eonia fixing and the repo market over year end. We think it is likely that the corporate bond and covered bond purchase programmes’ share of QE will be increased from January 2018.

Deutsche Bank: We expect a short presser. After last month’s announcements, we expect no new policies to be unveiled. Benoît Coeuré is in favour of ending net purchases in September 2018 and wants to break the link between QE and the inflation outlook. The minutes confirmed “several” members support this change. We expect Draghi to stress that a large majority of the Council supported the October policy stance and to play down the imminence of any changes to forward guidance. We expect the internal policy debate to become livelier next year as the consensus starts to breakdown over questions such as whether the policy stance should be rotating or tightening – Coeuré may be in the former camp rather than the latter – and the relative importance of price stability vs. financial stability – the minutes referred to prudential concerns from low rates for the first time. Changes to forward guidance could be the lens that amplifies the divisions on the Council, adding volatility to policy expectations in 2018.

HSBC: With most key policy decisions for the near term taken in October, the ECB’s December meeting is likely to be a low-key affair. But it could start setting the tone for an eventual exit from QE. From the minutes of the October meeting, we learnt that there was ‘broad’ agreement for the 9-month QE extension. Mr Draghi has said repeatedly that QE will not end suddenly. However, some concerns were raised that market expectations of further net purchases beyond September 2018 may not be justified. Updated ECB staff forecasts will also be published at this meeting. We believe the recent oil price increase will likely push up the 2018 inflation forecast by 0.3pp to 1.5%. A 2020 inflation forecast will be published for the first time – we expect it to come out at 1.8%, close to the ECB’s mandate of ‘below, but close to, 2%’ inflation. We don’t see major changes to the growth forecasts

Morgan Stanley: The ECB is unlikely to announce any extra measures at this meeting. The Q&A will possibly range from more details on the net asset purchases, which will be cut in half to €30 billion per month from January, to possible evolutions of the forward guidance next year. One focus will likely be the new staff projections, which will present 2020 for the first time. The key difference in the external inputs relative to the previous projections is the rise of the oil price, while the assumptions on FX and market rates are unlikely to have changed much. This should boost headline inflation by 20bp to 1.4%Y in 2018 and an extra 10bp to 1.6%Y in 2019, in our view. The 2020 forecast is likely to be at 1.8%Y. Following a couple of downside surprises, mostly related to seasonal and one-off factors, core inflation will likely be revised marginally down for 2017 and stay unchanged in 2018. However, as spare capacity closes faster, we expect a 10bp upward revision to 1.6%Y for 2019 and see 2020 at 1.7%Y. The reason why we expect the ECB to show core inflation trending higher, is that we think that the near-term GDP growth path is likely to be revised up too, given recent upside surprises in the data, to 2.3%Y in 2017 and 2.1%Y in 2018,a 30bp upward revision. We’d expect 2019 at 1.8%Y,a small upgrade, and see 2020 at 1.7%Y. This should close the output gap more rapidly.

Nordea: The ECB set the tone for its monetary policy for the next months in October by making the decision to continue the APP until at least the end-September 2018 and we do not expect any big changes to its stance in the coming meetings. Although economic growth is robust, we do not expect the ECB to make any changes to its forward guidance, as core inflation has continued to disappoint. The ECB’s recent buying behaviour already suggests it has started to use its room to manoeuvre more. The actual German share of the public-sector purchase programme purchases was clearly above the level implied by the capital key in 2015-2016, since the ECB had to compensate by buying bigger amounts in some of the larger countries to compensate for the lack of purchases in a number of smaller countries. As the ECB ownership of German bonds was starting to approach the issuer limit, the share of German purchases fell and has actually been slightly lower than implied by the capital key in three of the past four months. The deviations have been small, but they do indicate the ECB could interpret the capital key constraint as applying more to the entire volume bought rather than the monthly purchase volume.

RBC: The last ECB meeting of the year is likely to be a low-key affair. So close to the major changes to QE made in October it’s unlikely that any fresh announcements will be made next week. Instead, the focus for this meeting will be the new set of staff macroeconomic forecast published alongside which will extend the ECB’s forecast horizon to 2020 for the first time. This will be a key number to focus on as the inflation forecast might well be ‘close to but below 2%’, likely drawing markets’ attention. Coupled with the expected continuation of growth into next year it could have a major impact on the debate within the ECB as it begins to prepare the ground for what comes after the expiry of QE in September.