ECB Preview: Don't Expect Fireworks

Submitted by RanSquawk

Ahead of the ECB's Monetary Policy Decision due Thursday at 07:45 EDT/13:45 CET with a Press Conference due at 08:30 EDT/14:30 CET, here are the key highlights:

  • Unanimous expectations look for the ECB to leave its three key rates unchanged
  • Ultimately, this week’s press conference is set to offer little in the way of fireworks with June/July touted as a more opportune time for the ECB to unveil their next stage of major policy announcements
  • Draghi will likely make some reference to the recent softness in data but ultimately maintain that risks to economic growth are ‘broadly balanced’

BACKGROUND

PREVIOUS MEETING: The main takeaway from March's meeting was the ECB's decision to remove their pledge to increase the size and/or duration of QE purchases; an action viewed by the market as the ECB beginning to lay the foundations for more policy 'normalisation'. Aside from the removal of the easing bias, the staff projections saw only mild tweaks from those released in December with the most notable being an additional upgrade to the 2018 growth outlook from an already bullish 2.3% to 2.4%. Furthermore, Draghi also revealed that no additional discussions were held on further policy changes.

ECB MARCH MINUTES: In comparison to the ECB statement and press conference, the minutes offered a slightly more dovish account of proceedings by noting widespread concerns about the potential impact of trade wars. Furthermore, FX was also cited as a source of uncertainty, with EUR strength not fully due to the macro environment and fears that it could have a more negative impact on inflation.

SOURCE REPORTS: The most pertinent source reports came last week with the ECB said to see scope to wait until July to signal an end for its asset purchase program, adding that the ECB is said to have had no talks on the interest rate path after QE ends.

ECB RHETORIC: The most recent rhetoric from President Draghi stated that measures of underlying inflation are subdued but are expected to rise gradually over the medium term, adding that growth momentum is to continue; largely a reiteration. Other notable input came from ECB’s Nowotny on 10th April with the Austrian representative stating that the deposit rate could be lifted to -0.2% from -0.4% to start the process of rate hikes then go on to the main Refi Rate in the second phase; a view which was later labelled as his own and not representative of the view held by the ECB’s governing council by an ECB spokesperson. This also appeared to be at odds with comments from other members of the ECB which stated that mid-2019 is a reasonable timeframe for markets to expect rate hikes by the Bank.

DATA: Overall, data has been slightly softer since last month’s meeting but will most likely be downplayed by the ECB as largely a by-product of adverse weather conditions. Goldman Sachs explain that whilst the ECB will use weather as a driving factor rather than underlying economic concern, they are likely to acknowledge that March macro-economic staff projections are broadly on track, but that downside risks have become greater. On the inflation front, March’s HICP Y/Y inflation slipped to 1.3% from 1.4% with the core metric remaining at 1.0%, however, Capital Economics suggests that this blip is unlikely to deter many policymakers in their belief that inflation will rise towards its target in the medium-term. In terms of survey data, the Eurozone composite PMI for March pulled back to 55.2 (flash reading) from the highs seen in January of 58.8 and thus has erased gains seen later last year and early 2018.
 

CURRENT ECB FORWARD GUIDANCE (INTRODUCTORY STATEMENT)

RATES: We still expect the key ECB interest rates to remain at their present levels for an extended period of time and well past the horizon of our net asset purchases. (Mar 8th)

ASSET PURCHASES: Net asset purchases, at the current monthly pace of €30 billion, are intended to run until the end of September 2018, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim. (Mar 8th)

GROWTH: The risks surrounding the euro area growth outlook are assessed as broadly balanced. (Mar 8th)

INFLATION: This outlook for growth confirms our confidence that inflation will converge towards our inflation aim of below, but close to, 2% over the medium term. At the same time, measures of underlying inflation remain subdued and have yet to show convincing signs of a sustained upward trend. In this context, the Governing Council will continue to monitor developments in the exchange rate and financial conditions with regard to their possible implications for the inflation outlook.
 

POTENTIAL ADJUSTMENTS TO ECB FORWARD GUIDANCE (INTRODUCTORY STATEMENT)

RATES: No changes on rates communication is expected at this stage given preferred sequencing at the ECB.

ASSET PURCHASES: No additional changes expected to those made last month with June/July touted as a more opportune time for the ECB.

GROWTH: No changes major changes are expected on growth guidance, although recent adverse weather conditions may be discussed during the press conference.

INFLATION: No changes are expected on this front as that would require the ECB to acknowledge that their inflation objective had been achieved; something that it has not.

PRESS CONFERENCE

Ultimately, this week’s press conference is set to offer little in the way of fireworks with June/July touted as a more opportune time for the ECB to unveil their next stage of major policy announcements. June/July is viewed as a more likely time for Bank to outline its plans for policy normalisation as it will give the governing council the opportunity to digest an additional set of staff economic projections and see how the Eurozone economy performs in H1 2018.

In terms of what could be discussed this week, as mentioned above, Draghi will likely make some reference to the recent softness in data but ultimately maintain that risks to economic growth are ‘broadly balanced’, albeit SocGen questions whether or not ‘hopes of a strong and lasting cycle and rising potential growth were premature’.

Furthermore, Draghi will also likely comment/be questioned on recent protectionist measures which were cited in the March minutes and have escalated since the previous meeting as the US and China have now detailed plans for tariffs against other. Capital Economics explain that the fallout of this has been a firmer EUR which could pose concerns to policymakers outlook for inflation but ultimately should not be enough to derail the ECB in their belief that inflation will hit its target in the medium-term. Pictet also back the governing council’s view on inflation by stating that they “see very little evidence of a larger FX pass-through on core inflation” and “higher oil prices can be expected to provide a modest boost to headline inflation going into the more important June meeting”.

As ever, journalists will likely ask many a question to the ECB President about what discussions (if any) took place regarding the future path of the Bank’s PSPP. However, it is likely that Draghi will stick to his usual rebuttal of “we did not discuss this” in order to avoid an unwarranted tightening of monetary conditions ahead of the June meeting. Furthermore, Capital Economics argue that Draghi will also wish to avoid any specifics on the outlook for interest rates given the backlash seen to recent comments by Nowotny and will most likely reiterate the ECB’s press release when questioned.

As such, from a markets perspective, June/July is seen as much more of a pivotal meeting for the ECB and will likely see the commencements of the Bank’s series of policy adjustments. Please see below for Rabobank’s “expected ECB policy timeline”

MARKET REACTION:

Please see the following ING ‘ECB Scenario Analysis’ with subsequent potential market reactions.