• On the back of Draghi's speech in Sintra this morning and Benoit Coeuré's interview in the Financial Times yesterday, we change our call for the ECB outlook. We now expect ECB to cut rates by 20bp, introduce a tiering system, extended forward guidance, and restart QE in a package which could come already in September.

  • In ECB perspective, nose-diving inflation expectations and a higher probability of looming risks will materialise has caused a change in the change in call.

When and how, not if

At the annual ECB conference in Sintra, Portugal, Draghi gave another seminal speech, similar to 2017. However, this time, Draghi opened the door wide open to new easing where he was specific that ‘coming weeks, the Governing Council will deliberate how our instruments can be adapted commensurate to the severity of the risk to price stability.' Importantly, there has been a huge change from ECB in past 12 days since the last GC meeting as ECB will now act if there is no improvement in the in the economic outlook, so that inflation to target is threatened which compares to ECB acting if downside risks materialise.

Therefore, the question now remains when and how ECB will stimulate and not about if the will stimulate the market. As ECB will debate this over the next weeks it's difficult to call exactly what the measures will entail (annex has a list of possibilities). Draghi has previously shown a preference to deploy multiple measures at the same time and we expect ECB to come with a three part package; rate cut, tiering and QE restart.

The market impact and most prominently, the market inflation based inflation expectations has been very benign to the ECB. The 5y5y has surged from record lows of 1.13% to 1.21% in a sign of credibility in the ECB's new measures. However, the level is still very low and still far from ECB's target so the ECB has to deliver and come with a big package to satisfy markets.

We expect ECB to open for further easing in the July meeting, and announcement in September, alongside new staff projections, but also acknowledge a risk to earlier announcement should market and economic sentiment suffer.

A Bloomberg source story just now suggested ECB to favour a rate cut as the primary tool.


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