ECB Preview: 9 Major Banks expectations from September meet

As we head towards the ECB’s September meeting, following are the expectations as forecasted by the economists and researchers of 9 major banks.

Surprisingly all the bank views are divided this time regarding the extension of ECB’s bond-purchase programme but expect it to remain on hold as far as rates are concerned.

SocGen

The day’s big event is the ECB meeting and the market expects the bond-purchasing programme to be extended, and is braced for some expansion of the pool of bonds the ECB can buy. We tend to think that increasing the share of each issue the ECB can buy (to 50%) is preferable to lowering the yields they are prepared to buy at and both are preferable to messing around with the ‘capital key’ which determines the ratio of each country’s bonds they buy. But we wouldn’t rule out an imaginative solution either. The danger, in markets, is that they do nothing at this meeting. I don’t for a second suppose that would get the Euro up and out of its claustrophobic range, but it would be supportive.

Danske Bank

We expect it to remain on hold. The ECB has stressed that more data is needed before the growth and inflation outlook can be re-evaluated fully. Initial figures suggest resilience in economic sentiment following the UK's decision to leave the EU, so we expect the ECB to maintain its current stance. In addition, we expect QE purchases to be maintained at the current pace, although we believe it will eventually extend the programme beyond March 2017. Regarding TLTRO II, the ECB has stated that 'additional demand could be expected for the forthcoming TLTRO II operations', which supports our view that the ECB will maintain a patient stance until the allotment results of the second TLTRO II auctions (due to be published on 22 September).

Fidelity

The ECB will soon find itself at a crossroads, and will have to assure the market in principle that its QE programme will continue despite the negative side effects on the financial system. The lack of available risk-free collateral is the key issue for the bond market. With EUR 1.2tn EUR worth of government bonds now trading below the deposit rate, and therefore not eligible for the ECB’s PSPP, the ECB has two choices. They can reduce their deposit rate further from the current -40bp, buying more short dated bonds. Similar to a deposit rate cut, this would steepen European government bond curves and move core long-end rates further into negative territory. We do not believe that this will be welcomed by European banks, whose margins are under pressure already. The only realistic option for the ECB is to allow its member central banks to shift purchases away from scarce assets, such as Bunds, towards the bigger peripheral markets such as Italy, thus discreetly deviating from the capital key constraint over time. Politically, this is a tricky decision, and one that the Governing Council will take only after lengthy consultations later in the year.

Nomura

We think the ECB’s projections for the September meeting should show potential downside risks on growth. They should also essentially show unchanged forecasts on inflation, to the extent that the ECB chooses, as in June, not to incorporate in its projections the increase in oil prices. We think the projections in September need to convey some confidence in the framework that the ECB is following, in particular in terms of reaching its inflation objectives. We think one potential way of conveying such confidence would be to combine increased accommodation and a slight upward revision in the 2018 inflation projections closer to the 1.8-2.0% range. Such a change would be consistent with our call that the ECB will increase accommodation further.

RBC CM

We think the ECB will want to continue conducting their QE programme and a six months extension is a plausible expectation. However, this does not appear feasible without considering changes to the parameters of the QE programme itself. A poll of 70 analysts by Reuters shows consensus for no action today but an extension to QE by the end of the year, which would have to be coupled with some changes to the purchase programme to expand the universe of eligible assets. Our European rates team looks for the deposit floor to be dropped today, which would mean a rally in shortdated cash products and a kneejerk EUR negative reaction. Our economists look for the 2017 growth estimate to be lowered as the UK referendum is factored in, and that should have a knock on-effect on inflation. So while consensus might not be looking for an extension to QE today, that may understate the expectations for today’s press conference. As well as a relaxation of the depo rate floor, we are looking for signs that discussions have started on dropping the capital key. A complete repeat of the July meeting with no such discussions at all would be disappointing—in that case, we would expect to see EUR/USD bounce. Resistance comes in at the recent highs of 1.1368 while there is support at 1.1136 (200dma).

Rabobank

The refusal of core inflation to rise is a key reason for the ECB to maintain a dovish stance. However, given the streak of monetary expansion measures since December last year, we feel there is no strong reason yet for the Governing Council to drastically change course in September (although ECB staff projections for 2017 GDP growth are likely to be revised down). But things may heat up pretty soon after that. The currently communicated ‘earliest end date’ of the asset purchases programme has been set at March 2017. Given that it is quite unlikely that the ECB’s goal of ‘sustainable inflation’ will be met come March 2017, internal discussions on the future of the asset purchase programme are likely to begin soon. But answering the “how” and “to what extent” is probably not up for September.

RBS

Research Team at RBS, is not expecting any changes to interest rate settings or to the size and scope of the asset purchase programme (APP) at this Thursday’s ECB meeting. They are now expecting the ECB to extend the APP from March 2017 to September 2017. We had previously expected this to be announced at the meeting in December. Extending forward guidance on QE to late 2017 will require significant change to the programme. The issuer limit is arbitrary and should go, as should the maturity limit (31y). But to credibly extend its purchases of Germany, the Netherlands, and Finland, it must (i) choose to relax the issue limits for individual bonds, (ii) buy at yields below the deposit rate, or (iii) abandon the capital key for PSPP quotas entirely. We think that this will prove the order of preference: the issue limits should be relaxed.”

TDS

ECB is expected to keep rates on hold this week, and to delay any official QE extension announcement until December. The macro forecasts are unlikely to suggest an immediate urgency to ease, with the impact from Brexit appearing to be far smaller than what had been feared. When the ECB does announce its QE extension it will need to deal with an impending scarcity issue. We think that it will opt to scrap the deposit rate floor on asset purchases. This should lead to steeper EGB curves.  Waiting until December to announce an extension of the Asset Purchase Program gives the ECB more time to assess the impact of Brexit on growth and calibrate its monthly purchases in response.”

Westpac

After a (very) quiet summer, debate over policy in Europe will start to build momentum again this week as the ECB meets. Of course, inflation is the ECB's focus. There, while the annual headline rate remains near zero, the acceleration seen in the 6-month pace (mostly on base effects) justifies holding off on any further action for now. Instead, the ECB is most likely to hold fire on an extension of the duration of the asset purchase program for another few months and (again) focus the market's attention on the need for fiscal authorities to do more. A further increase in the purchase pace is off the table until 2017.

Click here to read more about the ECB Interest Rate Decision from our in house Chief Analyst Valeria Bednarik titled “ECB Preview: Draghi's hands are tied, last ditch efforts are the only hope”