ECB Preview: 13 Major Banks expectations from December meet

As we heading towards the much awaited ECB’s December meeting, following are the expectations as forecasted by the economists and researchers of 13 major banks.

Surprisingly all the bank expect the ECB to announce a six-month extension of its QE programme and maintain monthly purchases at EUR80bn while the deposit rate will likely remain at minus 40 bp.

HSBC

We expect the ECB to announce another six-month extension of QE at EUR80bn per month at its 8 December meeting. Due to the recent rise in bond yields, this may only require increasing to 50% (from 33%) the limit for bonds without Collective Action Clauses (CACs). Nothing is certain, however, and there is a risk the ECB opts to wait a few months before extending, announces a shorter extension, or opts for another form of monetary stimulus altogether, although we think this is unlikely. 

SocGen

In December 2016, we expect the ECB to extend the Asset Purchase Programme (APP) by six to nine months. A key question will be whether the communication stresses only that the asset purchases will continue until this new end-date (as we think), or includes the monthly volume of €80bn until the new end-date. As this is forward guidance, the ECB can still adjust its actions as it sees fit depending on data. Current levels of uncertainty may argue in favour of unchanged monthly purchases, but then likely also a shorter extension.  ECB President Mario Draghi’s challenge at today’s Council Meeting is to broker a deal whereby he doesn’t disappoint market expectations of an extension of the current (EUR80bn per month) asset purchase programme, while satisfying the demands of the more hawkish elements in the Council who want the pace of asset purchases to slow given the prospect of rising (but still low) core inflation and steady growth.

RBC CM

We expect the ECB to announce an extension to their QE programme when they convene next Thursday. The growth outlook for 2017 is challenging and, energy price developments aside, inflationary pressures remain weak. The exact form of an extension will depend on the outcome of the review of the asset purchase programme commissioned in September. However, we continue to see some watering down of the deposit rate floor (by allowing some purchases below the -40bp deposit rate whilst keeping the overall portfolio yield above that level) and allowing purchases to deviate from the capital key as the main changes necessary to allow purchases to continue beyond their current planned expiry in March.

Danske Bank

We expect the ECB to announce a six-month extension of its QE programme and maintain monthly purchases at EUR80bn. This is probably close to market expectations given a recent Bloomberg survey, where 64% of analysts expected a QE extension with the current pace kept unchanged. The market focus has over the past couple of months been focused on the risk of 'tapering' or 'end of easing'. However, in our view, that is premature and we do not expect the ECB to announce any kind of tapering at this meeting. Instead, focus is likely to be on potential changes to QE buying restrictions like the issuer limit, buying below the deposit floor at -0.40% or potential deviations to the capital key. Note that we do not in fact expect any of these changes to take place. Finally, the fixed income market will scrutinise if we see any changes to the securities lending programme (repo facilities) by the Bundesbank given the 'expensive bunds' in the repo market.

ANZ

The market is optimistic that the ECB will extend its quantitative easing programme at current levels for a further six months. There is a real risk of unpleasantness in European bond, equity and FX markets if Draghi doesn’t at least meet expectations. However, as well as the general emerging political concern about unintended consequences of QE for bank profitability and income inequality, there are undeniable political aspects to the fact that through its bond-buying the ECB is propping up the bond markets – and hence banks – of some countries with clearly unsustainable debt loads. The longer the charade continues, the larger the eventual bill for the European (read German) taxpayer, via ECB/central bank Target 2 settlement balances. Has the ECB, having done “whatever it takes” for years now, averted catastrophe or merely deferred it? It seems unlikely that Draghi will be willing to fold his hand today and find out. That’s certainly the market’s bet.

MUFG

ECB President Draghi has a tricky task today with the economic data from the euro-zone indicating a pick-up in activity. Last week, the euro-zone unemployment rate fell to 9.8% - an important development given it is the lowest level since July 2009 before the debt crisis in the euro-zone. The 9.8% level also indicates that the ECB is being too pessimistic itself. The current ECB forecast for unemployment in 2017 is 9.9% and 9.6% in 2018. The ECB is set to revise those forecasts lower tomorrow. But while the euro may be deriving support from some signs of cyclical improvement for the euro-zone economy which may curtail the dovishness of the ECB tomorrow, the return of fragmentation within the euro-zone financial markets, if sustained will be a far more important driver for the euro going forward. The need for the ECB to announce an extension in QE beyond March 2017 seems obvious to us. Even though the cyclical picture for the euro-zone economy looks to be improving, more serious problems related to the cohesion of the single market could be brewing. Given the escalated political uncertainty, now doesn’t appear to be the time to signal an end of ECB support that is clearly helping to stabilise financial markets in the euro-zone. We do not expect the resilience of the euro to persist whatever the outcome of the ECB meeting tomorrow.”

BBH

The big event ahead of next week’s FOMC meeting is this week's ECB meeting.  This is a live meeting in the sense that policy announcements are expected to be forthcoming.  What is at stake is not interest rates.  The deposit rate will likely remain at minus 40 bp.  Instead, decisions are needed about its asset purchases. First is extending the program past the current soft end-of-March time frame.  Most are focusing on a six-month extension, mostly on the basis that that was the length of time of the previous extension.  There is some speculation that the ECB could scale back the amount of monthly purchases (currently 80 bln euros).  If this does materialize, we suspect it may be an operational tweak in the covered bond purchases. Second is adjusting the decision-making rules about the purchases.  We suspect the ECB can modify some of its own rules, like the individual issue cap.  The ECB may also apply the minus 40 bp floor on the portfolio level rather than the individual security level, and this too would overcome or minimize the scarcity operational challenge. Third is measures relating to the securities lending program to address the stress in the repo market.   There has been some speculation that the ECB will take measures to improve its ability to provide the securities it buys back to the market.

Nomura

Our baseline remains a six-month extension to the programme duration that would take it to at least September 2017. We also expect the ECB to maintain the current pace of purchases of EUR 80bn per month, although with balance of risks skewed towards an extension but at a slower pace. In terms of amendments to the technical parameters of the programme, we expect the ECB to announce an increase in the ISIN and issuer limits for non-CAC bonds from the current 33% to 45%. The ECB might also alleviate the deposit rate constraint but we see this as less strategic for the smooth implementation of the programme at the current level of rates. Finally, we do not expect any changes in either of the policy rates at the December meeting.

TDS

We look for the ECB to say that it will conduct asset purchases at least until Dec 2017, but at an €80bn/month pace only through June 2017, leaving the door open for tapering beginning in mid-year.  Markets will also be eyeing updated macro forecasts, and especially the HICP forecast for 2019, as the ECB has moved forward introducing its 2019 forecasts by 3 months, likely for a good reason. We look for HICP at 1.8% in 2019, helping the ECB to justify an eventual move to tapering. However, we look for his meeting to merely open the door to tapering, and in fact for Draghi to likely go to pains to avoid using the word “taper” altogether and stick to language more in line with just adjusting the amount of monthly purchases. Overall we look for Draghi to ever so gently open the door to tapering, boosting the EUR by around 1%, and on the rates side we like German 2s5s flatteners and 5s30s steepeners, as well as 10y gilt-bund tighteners

BMO CM

Expect the ECB to announce another extension to its monthly asset purchases when it meets today. We look for the timeframe to be extended six months to September 2017, but there are reports that it won’t be that simple. Policymakers are considering a longer timeframe (beyond six months) but with fewer bond buys per month (so, less than €80 bln, or possibly a return to €60 bln). This will be the ECB’s signal to financial markets that the QE program has a limited shelf life and it won’t hurt that Germany would give it the nod.

Scotiabank

We expect the European Central Bank (ECB) to announce measures to prolong its asset purchase program of €80bn per month for at least 6 months beyond its current end date of March 2017 following the ECB’s next meeting on December 8th. This decision will be taken despite the fact that, for the first time in many quarters, the Eurozone growth scenario could be slightly revised up in the ECB staff’s December macroeconomic projections report. Indeed, the lack of any clear improvement in core inflation and the risk of a premature retightening in financial conditions following the recent rise in interest rates would, in our view, be strong arguments behind this decision.

Natixis

We forecast: (i) The ECB to extend the QE programme by 6 months until September 2017 and to maintain the pace of monthly purchases of €80 bn.   (ii) We think it is also very likely that the ECB will make changes to the parameters of the QE programme.  (iii) The ECB would react to adverse market reactions in the aftermath to the referendum in Italy by temporarily buying more Italian bonds within the QE framework (but we do not expect that specific measures on this last point will be announced)   (iv) In our view, inflation forecasts will be revised upward, with headline inflation now expected to average 1.3% in 2017 (vs. 1.2% in Sep.), 1.7% in 2018 (vs. 1.6% in Sep.) and 1.8% in 2019.  (v) Growth forecasts are unlikely to change much. 

Rabobank

We believe that the ECB will announce three important decisions after Thursday’s Governing Council meeting: i) an extension of QE beyond its official end-date of March 2017 (our base case is by 6 months) ii) the parameter adjustments necessary to ensure that the purchase program can continue without being hampered by limited availability of eligible assets (our base case is a combination of an increase in the non-CAC issue limit and a removal of the deposit rate threshold), and iii) offering clearer guidance with respect to its intentions in the medium-term (implying the prospect of a data-dependent wind down of its purchases beyond September 2017, but wrapped in a softly enough cloth to prevent markets from getting spooked). So finding the right balance in this message to the market is key. Therefore we expect the ECB to emphasize that the program cannot continue forever, that it will review its options during the course of the program but that any adjustment after September 2017 will be data-dependent.

Click here to read more about the ECB Interest Rate Decision from our in house Chief Analyst Valeria Bednarik titled “ECB Preview: between a rock and a hard place”