ECB Preview: 11 Major Banks expectations from July meet

Today we have an all-important ECB meeting and as the clock ticks by, here are the expectations as forecasted by the economists and researchers of 11 major banks from the upcoming July meet.

Most of the banks not expecting the ECB to announce any major changes to its policy parameters, while they are divided in their views about the bank dropping its easing bias on the asset purchase programme (APP). However, the comments that comes through in President Draghi’s press conference will be very closely examined.

Nomura

We are not expecting the ECB to announce any major changes to its policy parameters at the next Governing Council meeting on 20 July. We are, however, expecting the easing bias on the asset purchase programme (APP) to be dropped via the removal of the phrase concerning the Bank’s readiness to increase its size and/or duration from the forward guidance. That, in turn, should pave the way for a more formal announcement about the tapering of the APP at the following meeting on 7 September.  We believe there is now overwhelming evidence to suggest the euro area and broader world economy are normalising from a post-crisis repair phase. This is clearly why central banks – including the ECB – are readying markets for a (further) normalisation of monetary policy in the coming months. But when thinking how this process may impact markets, it is critical to distinguish between a prospective ‘normalisation’ of monetary policy that’s taking place as other drivers of economic activity are improving from a scenario where monetary policy is being ‘tightened’ because economies are overheating. The former should help prolong an economic cycle by generating greater alignment between the supply and demand for capital and by fending off financial imbalances.

Rabobank

We expect July to bring no changes in actual ECB policy; nor does it seem likely that the ECB will formally change their guidance at this juncture. In order to prepare for an official decision on the future of the asset purchase programme in autumn the Council will likely use this week’s meeting to further shape the narrative. We remain convinced that the ECB will taper purchases, though we do not see inflation meet any of the ECB’s self-imposed criteria. Mr. Draghi will have to address this issue by further disconnecting the future of the asset purchases from the inflation outlook, probably by tying it more to the growth outlook. 

Danske bank

All eyes will be on the ECB meeting, where we expect it to remove its readiness to increase QE in size (but to keep the flexibility in terms of duration) and to have discussed tapering after President Mario Draghi rejected such discussions at the latest meeting in June. In our view, a tapering discussion will be in line with the latest communication from Draghi, that in a situation where the economy continues to recover, monetary policy tightening could be needed in order to keep the policy stance 'broadly unchanged'. We still believe the ECB will continue QE but at a reduced pace of EUR40bn per month in H1 18. 

ING

We expect this week’s ECB meeting to be a double balancing act for Mario Draghi and his colleagues. The ECB wants to prepare financial markets for tapering, without creating a taper tantrum, while at the same time finding economic arguments supportive of tapering despite low inflationary pressure. More generally speaking, the ECB will continue facing very little homemade inflationary pressures. Given the latest bond market developments, the ECB’s macro assessment will not be the main item of this week’s meeting. A possible unwinding of QE – tapering – is at the top of the mind of all market participants and ECB watchers. We believe that given the cyclical upswing, the disappearance of deflationary risks, opposition against QE from some ECB members and the bond supply scarcity issue, the ECB wants to move towards tapering. However, the ECB ideally would like to prepare markets without distorting them.

Lloyds Bank

The brighter economic outlook in the Eurozone has already resulted in an upward revision to the ECB’s assessment for growth to “broadly balanced”, while its explicit reference to potentially lower interest rates was removed.  At today’s meeting, markets will be looking to see if the ECB’s easing bias for asset purchases will be altered. Currently, it states that “we stand ready to increase our asset purchase programme in terms of size and/or duration”. We think the reference to the “size” may be removed. In any case, President Draghi at the ECB press conference is likely to be mindful of the potential market impact of any changes to its communication. As such, he is likely to emphasise that any policy adjustments should be “prudent”, to ensure inflation reaches the ECB’s target of close to, but below, 2% on a sustained basis. We do not expect the ECB to announce any changes to its asset purchase programme until after the summer.

BNPP

Our economics team expects ECB meeting to be a holding operation, with the central bank likely to offer little new information on its plans or expectations to begin tapering asset purchases from January of next year. To the extent possible, we expect President Draghi to lean dovish in his comments. The sharp appreciation of the EUR and rise in bund yields over the past month is likely a concern for the ECB and the central bank will likely be keen to avoid exacerbating the resulting tightening of financial conditions. While we except the ECB President to avoid language which could add to EUR appreciation pressure, he may struggle to find a formula which substantially reverses EUR strength. After all, the market is only expecting a reduction of the pace of asset purchases to begin in January, and President Draghi is unlikely to discourage this anticipation beyond perhaps noting that the ECB is sensitive to the impact of exchange rates and financial conditions in formulating policy.

BMO CM

No changes to monetary policy (refi rate at 0.0%, deposit facility at -0.4%, marginal lending facility at 0.25%) are expected. The usual line, “the Governing Council expected the key ECB interest rates to remain at their present levels for an extended period of time, and well past the horizon of the net asset purchases” will likely be in the press statement. And given that the ECB (and practically all central banks) has yet to see a “sustained adjustment in the path of inflation consistent with its inflation aim”, expect confirmation that net asset purchases will continue to run until the end of December 2017. However, what President Draghi says during the press conference, which begins at 8:30 am ET, will be more interesting. This will be a great opportunity to pick up on the more upbeat tones that have gradually taken hold over the past year.

TDS

We expect a relatively straightforward meeting with no announced policy changes. However, we do expect a tweak in the language, indicating that QE would now only be adjusted in duration, not size. The Eurozone economy has performed well this year. While core inflation remains depressed, the strength in real activity should boost the Governing Council’s confidence that they can taper QE next year. However, we don’t expect Draghi to acknowledge any detailed tapering discussions at next week’s press conference.

BBH

The ECB will not change policy.  It is unlikely to announce any change in its asset purchases.  However, it is likely to continue to evolve its assessment and extend its removal of downside risks by dropping the possibility that it could accelerate its asset purchases if necessary.  This has long stopped being pertinent.  Nevertheless, in the name of good housekeeping, and for the sake of preparing the investors for tapering, the wording can be adjusted.  We expect that presented with new staff forecasts in September, the ECB will use that meeting to announce that it will continue to expand its balance sheet by buying mostly sovereign bonds next year, but at a reduced pace.  We suspect a six-month extension will be sought (instead of nine as the length of the current extension) and a pace of 30-40 bln euros a month.  There is some risk that it stops buying ABS securities altogether.  It does not appear to have been a particularly successful endeavor.  

HSBC

In our view, the ECB is rightly preparing markets and governments for the end of QE. But with no signs of underlying inflationary pressures, and political risks ahead, we have not changed our view that tapering will not end until Q4 next year. And with the ECB maintaining its guidance that rates will be on hold until net purchases have ended, we do not anticipate any policy rate rises this year or next. There won’t be a new forecast in July. But the story hasn’t changed much from June. Survey data, although they have softened a little, continue to point to healthy growth in Q2. But as Mario Draghi has long argued, the good news on growth is not translating into higher inflation. In June, inflation fell to 1.3% y-o-y, although core and services inflation ticked up slightly. The oil price is c7% below the cut-off point for the June forecast, and the euro has appreciated another c1.3%. So if anything, there is a risk of another downside revision to the ECB inflation forecast in September.

Westpac

The market has continued to speculate over a near-term change in the stance of policy by the ECB in recent months. Optimsim in the region is unquestionably strong and this has supported robust gains in the Euro. The reality is that no announcement is likely until at least September, when the ECB's next set of forecasts will be released. The actual stance of policy wont change until the beginning of next year. During 2018, the pace of asset purchases will be curtailed, but only slowly. In terms of the key themes, the focus for post-meeting communications will be on: underutilisation of labour and associated weak wages growth; consequent expectations for core inflation; and the balance of activity growth between consumption and investment.

Click here to read special preview of the ECB Interest Rate Decision from our Chief Analyst Valeria Bednarik titled “ECB Meeting: warming up for tapering or not?”