With the debt crisis in the Eurozone starting to gain momentum once again, it seems more probable that the ECB will modify its monetary policy in June. Ecomists surveyed for the special forecast report point to different scenarios of the central bank's action, but all agree that something should be done in the face of the recent deterioration of the EU economic environment."A rate cut is certainly desired for the struggling European economies," suggests Yohay Elam, while Clemente de Lucia affirms that "a reduction of the refi rate and further liquidity injections can help banks." Adam Narczewski also considers a rate reduction scenario although he gives it only a 50% possibility.
Other analysts see the extension of the central bank's LTRO program more probable and advisable. Alberto Muñoz, who thinks that as long as inflation is kept in check there is no need for a rate cut, believes that "the possibility of a LTRO program is gaining more points due to significant liquidity problems for the majority of the European banking sector.2
Nevertheless, some of the experts predict the ECB might remain on hold in June, due to the fact that "they will need all the ammunition after a possible Grexit" as Adam Narczewski points out. In case of such an outcome "the most probable Euro reaction will be another nose dive," speculates Valeria Bednarik.
The ECB will announce its interest rate decision on June 6 at 11:45 GMT. Read below full forecasts of the contributing analysts.
Kathy Lien - Director of Currency Research for GFT:
"One of the most important event risks this week is Wednesday’s European Central Bank monetary policy announcement. The near term outlook for the EUR/USD hinges on the ECB’s degree of proactiveness. Throughout Europe’s sovereign debt crisis, the ECB has only been reactive but after avoiding the issue for weeks and constantly passing the ball back to politicians, ECB President Draghi will have no choice but to address the deterioration in economic data, the strain on Spanish finances and the decline in asset markets around the world. Based upon recent developments in the financial markets and the economy, the ECB should ease quickly and aggressively. However the decision will not be an easy one because Mario Draghi is extremely close in succeeding on his attempts to pressure European politicians into action. If he waits a few more weeks, we will probably get an announcement from G20 leaders. As a result, tomorrow’s ECB meeting will be a very close call because the ECB needs to ease but there are advantages to waiting. In addition to the monetary policy announcement and ECB President Draghi’s press conference, the central bank will also release its latest quarterly inflation and GDP forecasts – both of which are expected to be lowered."Clemente De Lucia - Economist at BNP Paribas:
"Admittedly, the recent deterioration of economic conditions calls for bolder actions by European leader and institutions. Monetary policy can react faster than fiscal policy to sudden changes in the economic environment. Leading indicators of activity growth are consistent with further cuts in policy rates.Clearly, a reduction of the refi rate and further liquidity injections can help banks, particularly those banks that have problems in finding liquidity in the market. Nevertheless, something more have to be done on the fiscal side. If the problem is the weakness of demand, due to the lack of confidence, high level of uncertainty (related to contagion risks), weakens of the banking sector (many banks, particularly in Spain should be recapitalised ), then actions by national authorities are needed. Measures adopted by the ECB can help, but what the eurozone desperately needs are “brave” steps by EU leaders towards fiscal integration to address the eurozone's deepening debt crisis."
Adam Narczewski - Financial Analyst at X-Trade Brokers, XTB:
"The recent developments in Europe (Greece and Spain) might finally push the ECB to act. In the last couple of weeks the central bank was rather inactive on the bond market repurchasing small amounts of bonds of distressed countries. It seems this program is slowly ending although if 10-year yields in Spain or Italy go way over 7%, the bank might intervene again on the debt market On one hand there is need for the ECB to do something right now, on the other, they will need all the ammunition after a possible Grexit. Cutting interest rates in June is a possibility the bank might strongly consider (I give them a 50% chance for a cut) but I do not believe it will not provide the necessary stimulus to the troubled countries. I also do not think an extension of the LTRO program is the best solution but at this moment it seems is it the only one the ECB might be considering. Eurobonds could be a solution, but this is not the ECB’s call, but Germany’s which is strongly against them."Yohay Elam - Analyst at Forex Crunch:
"Mario Draghi hinted that the ECB is in no rush for any action. Regarding the LTROs, Draghi said that more time is needed to asses their impact, so a third round of LTRO isn't likely to be announced in June's meeting. A rate cut is certainly desired for the struggling European economies. Recent PMI data was very worrying, even for Germany. Nevertheless, there are higher chances that the ECB will not cut the rates below the historic low of 1% as headline inflation is still above the 2% target.In the previous press conference, Draghi was relatively optimistic regarding a recovery in the second half of the year. His words will probably not suffice this time. In the current situation, a rate cut will be positive for the euro. The ECB might cut the rates as part of a globally coordinated move by central banks."
Dr. S. Sivaraman - CEO and owner of i-knowindices.com:
"ECB is expected to announce the interest rate decision by 11:45 GMT on -6th June. The rate is expected to be unchanged (1%).ECB press conference is to be held from 12;30 GMT. Even though there is lot of expectations that the uncertainty in EURO zone could induce ECB to take some measures and steps like rate cut. But ECB is expected to be cautiously optimistic and and that could act as market stimulus. LTRO program may not be extended as ECB might think they could give different approach to handle the situations.On 06th June EURO is expected to open high and slide during Japanese session. During Early European session before the ECB announcement there may be dip in EURO and a quick rise may be seen after 11;45 GMT announcement. After some volatile moves EURO could rise more towards close of European session after ECB press conference. Small dip and then rise moves may be seen during US session."
Ilian Yotov - FX Strategist and Founder at AllThingsForex:
"With Euro-zone economic growth nowhere to be seen and the future of the euro more and more uncertain with each and every vote from an electorate unhappy about the lack of balance between austerity and growth, the European Central Bank will be forced to ease policy further by buying more bonds, considering LTRO 3, or cutting rates. As the threat of recession looms over the Euro-zone economy and with the EU debt crisis escalating, either one of the above options looks likely to be deployed soon and neither one will be euro-positive."Bill Hubard - Chief Economist at Markets.com:
"After another series of depressing Eurozone economic data this morning, we now feel that the ECB will likely respond to weaker data on money and credit growth as well as on inflation and economic activity by REDUCING rates to a record low of 0.75% at one its next 2 meetings. A cut on June 6th is quite possible, although the ECB may fully respond to the new round of EUR tensions only in July, that is after the June 17th Greek and French elections.Inflation receding: With the oil price having dropped 18% since February, Eurozone inflation fell by 0.2% to 2.4% in May – the lowest rate in more than a year. German inflation declined to 1.9% in May, its lowest since December 2010.
Money growth slowing sharply: M3 growth dropped to 2.5% y/y in April. M1 growth, usually a good leading indicator of economic growth with a 9-month lead, also fell abruptly – to 1.8% y/y in May from 2.8% in April. Parts of the Eurozone suffer from a credit crunch.
Leading economic indicators highlight that market tensions are hitting economic confidence in crisis and non-crisis countries alike. The Eurozone could fall back into recession in Q2 and Q3 2012 and ECB staff projections are likely to reflect that in downward revisions to growth forecasts.
However, the fiscal compact is still not ratified. The new French president is exploiting the pending ratification of the fiscal compact to pressurise Germany into accepting a slower pace of fiscal rebalancing. Ahead of French parliamentary elections on June 17th and the EU summit on June 28th-29th, no final deal between Germany and France is likely. In the absence of an overall strategy to manage the crisis, the odds are slightly in favour of the ECB ‘preparing’ a cut in June but delivering the cut in July.
If the Greek situation deteriorates after the 17 June elections and causes significant contagion, the ECB would probably step up its response considerably. In that case, rates cut be cut to 0.50% and not just 0.75% in July. New large-scale liquidity provisions could also be deployed. As a last resort, the ECB could even start purchasing government bonds again."
