ECB Preview: 10 major banks expectations

Today, the European Central Bank (ECB) is set to announce its Interest and Deposit Rate Decision at 11:45 GMT. The ECB is set to leave its policy unchanged but take stock of the current economic situation. As we get closer to the release time, here are the expectations forecast by the economists and researchers of 10 major banks, regarding the upcoming ECB meeting. Comments about the exchange rate of the euro – following concerns previously expressed – are also eyed.

Action Economics

“We feel that the ECB will leave overall policy settings unchanged, but expect Largarde to strengthen the commitment to the ‘low for longer’ stance. One way would be to follow Villeroy's call for a more symmetric inflation target that will make it clearer that the ECB will let inflation run above target for a while following the current period of disinflation. The Fed already took a similar step with a move to a relaxed average inflation target and given the subsequent rise in EUR-USD Villeroy could argue that this puts pressure on the ECB to follow suit if it doesn't want to risk an overshooting currency with all the implications for export demand and domestic inflation. Any attempt to make the PEPP program a more permanent feature, however, would likely draw much more resistance and is an unlikely option at the moment, even if a further extension with a higher ceiling remains options if economies don't recover from the pandemic as quickly as hoped.”

ABN Amro

“We think that the tone will be dovish, which should encourage expectations of another round of monetary easing in the coming months. We expect the ECB to emphasise that it stands ready to ease policy further to bring inflation back to its pre-crisis path. In addition, the Governing Council should stress again that although it does not target the euro, swings in the currency do impact its macro projections and hence the appropriate stance of its monetary policy. The ECB will ease policy again by the end of this year, most likely in December. Our base case is for a €500B increase in the PEPP envelope. In addition, given sharply increasing liquidity and the fall in money market rates, we judge that the ECB will increase the tiering multiplier in the coming months. This should provide a modest boost to bank profits. Finally, we remain of the view that the deposit rate will remain unchanged. However, a significant further rise in the euro could put a rate cut back on the table.”

ING

“We expect the ECB to acknowledge the v-shaped rebound since the lifting of the lockdown measures, while at the same time still stress the high level of uncertainty. We will have a close look at the ECB’s inflation projections. In June, the ECB expected an inflation rate of 1.3% for 2022. Any downward revision will increase the likelihood of additional monetary stimulus. Interestingly, and in our view highly policy-relevant, the ECB’s research concludes that the more credibly and effectively monetary policy counteracts external inflationary pressures, the lower the pass-through of exchange rate movements will be. An open door for more stimulus. As regards the ECB’s strategy review, we don’t expect any insights in the ECB’s strategy next week. It is hard to believe that Christine Lagarde will want to preempt the discussion which has just started. In the end, however, we still see the ECB moving to a more symmetric target changing the definition of price stability to ‘around 2%’.”

Rabobank

“We expect the ECB to refrain from any policy changes next week, but Ms. Lagarde will reiterate that the Bank remains ready to adjust policy as and when necessary. Mr. Lane’s recent verbal intervention in FX markets has increased speculation of ECB easing, but we don’t see the EUR at critically high values that warrant an immediate response. Moreover, the economic data have –so far– been in line with, or slightly better than, the ECB’s baseline expectations. The GDP forecast for this year will likely be revised modestly higher. In the long-run, inflation remains quite subdued, and we continue to see risks skewed towards more ECB action. The ECB could downgrade its inflation path to reaffirm this bias to markets.”

SEB Bank

“The ECB will likely stay on hold with all its main policy instruments. In other words, speculation that the bank would ease monetary policy further on concerns about the strength of the euro and out the pace of economic recovery (speculation that contributed to euro weakness this week) has been somewhat overdone. Any decision to change asset purchases is likely to be deferred. 

Nordea

“Our baseline is no new actions yet next week, but it is a close call and risks are clearly skewed towards more easing. We also believe the ECB will go a long way to prevent a repeat of the disappointing March meeting and will bring loads of promises of action to come, if not concrete actions. Lagarde will not want to repeat her past mistakes by sounding overly hawkish, and we see risks tilted towards the ECB deciding to act already next week. This would alleviate the strengthening pressure from the EUR further, support further intra-Euro-area spread narrowing, lower core yields a bit further and support equity prices. The already risen easing expectations should limit the market reaction to some extent, though.”

TDS

“We look for the ECB to leave its policy levers unchanged. However, with growing downside risks to the inflation outlook, it will want to show some willingness to react. We look for the ECB to err on the side of caution when addressing the recent EUR appreciation and avoid giving markets a green light to push it higher from here. We expect Lagarde to highlight the flexibility of the PEPP in the pace of purchases, perhaps going so far as suggesting that the pace of buying will pick up in response to the downgraded inflation outlook. Further rate cuts seem to be off the table for now, though we wouldn't be shocked to learn that the Governing Council did at least discuss them, given they have been the traditional tool to deal with unwanted exchange rate appreciation.”

Danske Bank

“We expect the ECB to repeat its ‘readiness to act’ stance while looking into an uncertain economic and inflationary outlook. As such, we expect a relatively uneventful meeting with no new policy signals. That said, with recent diverging comments from Weidmann/Schnabel vs Lane we may be see disagreement building, notably on the QE programme and the size of future policy response. We expect the ECB to face questions on the Fed’s average inflation target (AIT) regime and the implications for the ECB’s strategic review which is restarting now. We expect Lagarde to take note of the Fed’s AIT regime and say that the ECB will not draw premature conclusions on its own review.”

Deutsche Bank

“Our European economists think that the policy stance will be left unchanged, but that the ECB will reinforce their communications with a resolutely dovish message, before easing further in December with an expansion of their asset purchase programme. That December easing would coincide with the release of the ECB’s staff 2023 inflation forecasts, which could form the basis for a policy shift.”

MUFG Bank

“We doubt that the ECB will provide a less dovish policy signal at the current juncture as suggested by the Bloomberg report. President Lagarde has an opportunity to express more concern over downside risks to their inflation outlook. While one should never put too much weight on just one inflation reading, the August CPI report was a shocker showing core inflation falling to a new record low of just 0.4%. If inflation continues to fall further below their target and the ECB does not respond, it increases the risk that inflation expectations will adjust lower as market participants lose confidence in the effectiveness of ECB policy. It would put upward pressure on real yields in the euro-zone and further strengthen the euro. We expect the ECB to take the opportunity to push back against euro strength today and to signal an openness to further easing even if the growth outlook has improved slightly. If the ECB disappoints in any way, markets participants are waiting eagerly to push the euro higher against the US dollar in anticipation of further easing from the Fed at their next FOMC meeting on 16 September.”