ECB research: Hawkish wording but changed forward guidance less likely

• Fading political uncertainty implies the way has been paved for more hawkish communication from the ECB at the meeting in June, bringing renewed market focus to the ECB's exit strategy.

• The ECB has many other options than removing the ‘or lower levels' phrase in its forward guidance on policy rates and in order to avoid a tightening of financial conditions a more cautious approach seems likely.

• The ECB's key challenge is a lack of wage pressure and as long as there are no signs of improvement in the underlying price pressure, the ECB seems to stick to its policy stance in terms of policy rates, QE purchases and forward guidance.

Market's attention could again turn to the ECB's exit strategy

The political risk in the euro area has been reduced considerably with Macron winning the French presidency and market's attention could again turn to the ECB's exit strategy. In our view, the way has been paved for a more hawkish communication at the next meeting on 8 June when the ECB will also have the next inflation print for May and updated inflation projections. In our view, a more hawkish wording should not be seen as a sign of near-term actually tightening. Instead, it should reflect there are a lot of soft words in the introductory statement (see next page), which need to be taken out gradually before actually tightening the monetary policy. Related to this, we still believe the ECB will extend its QE purchases by EUR40bn per month going into next year as the underlying price pressure remains weak. This also implies it is premature to believe in rate hikes any time before 2019, in our view.

There has been a lot of discussion about whether the ECB will change its forward guidance on policy rates and remove the ‘or lower levels' phrase at the upcoming meeting in June. The Governing Council discussed such a change at the meeting in March after which the market priced in a 10bp deposit rate hike from the ECB already this year. If the ECB makes this change to its forward guidance, it is likely to have considerable market implications with the pricing of policy rate hikes again being moved forward. However, such a price action does not seem to be what the ECB wants already, as the communication from prominent ECB members turned much more dovish in an attempt to dampen the speculation about rate hikes after the meeting in March.

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