ECB: Governing Council slowly shifting to revising outlook – ABN AMRO

Nick Kounis, head of financial markets research at ABN AMRO, suggests that due to the disappointing economic data flow, they think the ECB will finally shift its assessment of the balance of risks to being tilted to the downside at its meeting later this week.

Key Quotes

“At the December meeting, the Council already seemed to be shifting in this direction. It noted that ‘the risks surrounding the euro area growth outlook can still be assessed as broadly balanced. However, the balance of risks is moving to the downside’. Since then, the economic data flow has remained weak, and at 1.7%, the ECB’s economic growth forecast for this year looks very optimistic. We think that this would be a signal of further downgrades to the central bank’s economic growth and inflation projections in its next economic update.”

“This will set the scene for a change in its forward guidance by the June meeting. Indeed, we expect the Governing Council to change its forward guidance on interest rates to signal that it no longer expects to raise its policy rates this year.”

“We expect a 10bp hike in all the policy rates in March 2020 and a second 10bp increase in September 2020. However, we see the risks skewed towards an even longer period of unchanged interest rates given the slow growth environment and subdued underlying inflationary pressures.”

“Meanwhile, we also expect the ECB to hint that it is preparing to announce changes to its TLTRO programme going forward. We think that the ECB will announce an extension of its TLTRO programme. In the current context, we see this as mainly trying to ease refinancing problems for Italian and, to a much lesser extent, Spanish banks.”