ECB Preview: 14 Major Banks expectations from January meet

As we are closing on to the ECB’s January meeting, following are the expectations as forecasted by the economists and researchers of 14 major banks. Almost all the banks expect no major changes or announcements from the ECB and no fresh initiatives while the focus will shift on the Draghi’s press conference and Q&A session.

HSBC

Eurozone inflation is rising sharply, and the hawks might start asking for an early tapering of QE but Mr Draghi made a shrewd move in December, announcing an extension of QE to at least end-2017 and with underlying inflation subdued, we doubt the ECB will be bowing to pressure just yet. The ECB will also be wary of tightening monetary policy too soon, repeating the mistake of 2011 when it hiked rates, helping to curb the fragile recovery. All in all, we think that the ECB will be on hold in January, and indeed in the coming months, looking through the inflation peak in the first half of next year before having to make a decision on the possible future of QE. And given that we think underlying inflation will remain stubbornly low (see our latest European Economics Quarterly: "And now for something completely different?), in our view QE will continue at EUR60bn per month until the end of the year, and then at a slower pace (EUR40bn per month) from January 2018.

RBS

The Governing Council meeting on Thursday is unlikely to give significant new clues to the ECB’s reaction function. Policy settings will almost certainly remain unchanged, with the depo rate at -0.4% and QE purchases at €80bn per month until end-March 2017, stepping down to €60bn from April 2017. We believe the Governing Council’s economic assessment may be slightly more optimistic, but the policy debate should be unchanged and simply reference the decisions taken in December. With no new actions expected, the focus on Thursday is likely to be on the Q&A.

Deutsche Bank

Our central case scenario is a patient ECB. They should be reassured by broadly unchanged financial conditions after their decision to slow the pace of QE. The ECB won’t feel challenged by the recent data. If current data trends continue, the outright taper decision could accelerate to June rather than September, but the latter is our baseline. The key is whether inflation, especially core, is becoming more likely to exceed ECB forecasts. Euro area headline inflation should rise sharply in January and February, to 1.6% and 1.8% yoy respectively. That said, mid-year is the earliest that the less convincing core inflation will satisfy the minimum conditions for policy tightening. However, the ECB won’t be afraid to change plans, if necessary. If a "sustainable adjustment" in inflation is reached, we don't think the ECB would hesitate to act, even changing the current plan.

Rabobank

We think that December’s increase in headline inflation – from 0.6% to 1.1% – is unlikely to startle the ECB, as this number masks some of the underlying weaknesses that continue to persist. Eurozone core inflation barely increased however and remains well within the 0.8%-1.0% range it has been in the past 1.5 years, showing that there’s no demand-pull price pressure yet. Absent any expectations of new ECB action following December’s long-term commitment, the sharp increase in headline inflation is likely to draw most of the attention in this week’s press conference. However, the weak underlying dynamics give President Draghi plenty of arguments to warrant the ECB’s Governing Council to stay the course for now. Let’s not forget that there are still many (political) uncertainties out there, which were reason for the ECB to opt for a 9 month extension of QE. We therefore believe that, barring any major upset in European politics or new economic headwinds, the GC will not extend QE at its current pace. We currently foresee that the Council will want to announce the start of a formal tapering path in December. Our baseline scenario is for a tapering pace that will bring asset purchases down to zero by mid-2018, at an average pace of EUR 10bn/month.

RBC CM

No major changes or announcements are expected from today’s first ECB Governing Council meeting of 2017. The package of measures announced in December should set the ECB’s policy course for the majority of this year. However, headline euro area inflation has increased of late and is forecast to continue doing so in coming months triggering calls in some quarters for the ECB to consider tightening policy.  We fully expect the ECB to choose to ‘look through’ the rise in headline inflation, which is being determined primarily by energy price developments, and focus instead in coming months on the evolution of core inflation which has remained below 1%. Until that measure begins to show a sustained upward trend the ECB will seek to keep a high degree of support in place.

MUFG

The ECB has received positive news on both economic growth and inflation in the euro-zone since their last policy meeting. The euro-zone economy appears to have gained further upward momentum at the end of last year while headline inflation is being lifted by the rebound in energy prices. If ECB President Draghi acknowledges the favourable developments, it could offer some modest support for the euro. However, it is likely that President Draghi will maintain a cautious tone stressing that there has been little evidence of pick up in core inflation pressures yet. It is too soon for the ECB to adopt a less dovish tone after just agreeing last month to extend QE until the end of this year. By maintaining loose policy throughout this year, it should help to keep the euro weak.

TDS

The ECB makes its first policy statement since December’s “trim” announcement. While this meeting should be a relative snoozer, the rise in euro area—and particularly German—inflation in December will put pressure on President Draghi to ensure the ECB’s 2017 policy commitment remains intact. Hawks are already concerned that German inflation, at 1.7% y/y, is approaching the ECB’s implicit target, but we note that core inflation still remains far below target. We expect President Draghi to reinforce past statements that there are still no signs of a sustained upward trend in core inflation, and that the ECB cannot envisage a scenario in which it reduces stimulus in 2017 at a faster pace than already announced, keeping its asymmetric policy commitment unchanged. This should leave rates and FX markets relatively stable through both the statement and the press conference (though we flag overlap with a Trump press conference at 2:15GMT).

Danske Bank

We do not expect a hawkish stance from the ECB, although the latest economic survey indicators have strengthened further and inflation has risen above 1.0% for the first time in three years. President Mario Draghi will most likely argue that the ECB does not react to a single inflation figure, that the latest inflation gains are due primarily to energy prices and consistent with the ECB’s inflation forecast – broadly in line with last week’s comments from the hawkish executive board member Yves Mersch. The higher inflation is good news for the ECB but it seems clear that the underlying price pressure is most important and here there are ‘no signs yet of a convincing upward trend’. We expect the ECB to extend its EUR60bn monthly QE purchases into 2018.

BBH

After having adjustment policy last month, there seems to be practically no chance that the ECB introduces new initiatives.  Draghi's presentation may be ho-hum. The eurozone economy has evolved in line with the ECB's expectations.  Investors will be most interested learning Draghi and the ECB's take on the stronger than expected rise in CPI.  

Nomura

In line with an overwhelming consensus, we do not expect any changes to the ECB’s monetary policy programme at today’s meeting. Instead, we expect the focus to be on the Governing Council’s assessment of macro-economic developments in light of some positive dataflow over the past few weeks. Thanks in part to that dataflow, we now believe the risks to the ECB’s (and consensus) forecasts for the growth and inflation outlook have shifted to the upside. During the post-meeting press conference, President Draghi will nevertheless probably re-emphasise the ECB’s strong commitment to the existing monetary policy programme by stressing some of the numerous downside risks that could generate further instability for the region in the months ahead.

ANZ

The tone of this week’s ECB meeting may be more even-handed given the improvement in euro area inflation and encouraging readings on activity.  Market chatter of an early end to QE seems premature, however, given that core inflation is still way below target and there is no evidence yet of a sustainable recovery in inflation. However, as growth and inflation improve, it is natural to expect the ECB may not have to announce additional policy measures.

BMO CM

No changes to rates or policy are expected at the Thursday ECB meeting. After all, it was just one month ago that President Draghi announced some significant changes to its measures: extending the asset purchase plan by nine months (to December 2017), lowering the monthly amount of bonds bought to €60 bln starting in April (from €80 bln, currently), including one-year paper to be purchased (from 2-30 years), and allowing bonds with yields below the -0.4% deposit rate to be bought. The January meeting is, clearly, too soon to introduce more changes. But, the President’s answers to questions raised during the press conference—likely revolving around those “few” members, what other options they have, what could cause the ECB to tighten conditions sooner, and so on—will be interesting to hear.

BNPP

We expect the European Central Bank to signal cautious optimism about the economic outlook at its press conference on 19 January and to emphasise reduced risks of deflation. President Mario Draghi is likely to downplay the monetary-policy implications of recent data, however, for fear of stoking premature talk of an end to quantitative easing. Mr Draghi will probably stick to the line that scaling back asset purchases is not equivalent to tapering – ie, that there is no plan to cut purchases to zero at this stage. The ECB should reach for the controls again later this year, as it starts to eye an exit. In our view, the asset-purchase programme will be at or close to its final destination in mid-2018.

Natixis

We believe that nothing significant will be decided despite that inflation has already started to increase rapidly. Even though it seems that the board of governors is assessing the situation with outdated forecasts we also believe that they are aware of this fact. Knowing that inflation will very likely reach a peak in April before declining gradually suggests that at this stage the ECB will not make any decision to change its current stance. Consequently, the Q&A will likely be demanding for Mario Draghi since he will have to maintain a stance not totally supported by the picture reflected in the ECB forecasts. All in all, we do not expect a lot from this meeting.

Click here to read more about the ECB Interest Rate Decision from our in house Chief Analyst Valeria Bednarik titled “ECB Preview: confident Draghi to boost the EUR”