ECB Preview: 7 Major Banks expectations from April meet

With the markets heading towards ECB’s April meeting, we are listing down the expectations as forecasted by the economists and researchers of 7 major banks.

Almost all the banks expect that the ECB will be pressured on Dovish guidance while they are expected to keep all key interest rates and quantitative easing (QE) programme parameters unchanged. Also, with no policy change expected, the market is likely to focus on forward guidance.

Danske Bank

We expect a slightly dovish tone from Mario Draghi at this week’s ECB meeting, as the main message should be that the ECB is on autopilot with its current monetary policy. Draghi has recently said ‘a reassessment of the current monetary policy stance is not warranted at this stage’ and we expect him to reiterate this, which should be perceived as dovish. Following the latest ECB meeting, speculation about the sequencing of the ECB’s exit from the very accommodative monetary policy increased and a month ago the market priced a 10bp deposit rate hike this year. Now the pricing of the hike has been postponed to late 2018, after prominent ECB members expressed a dovish view, thereby dampening market participants’ expectations. In our view, the recent dovish tone reflects the ECB’s perception of the pricing of hikes as a tightening of the financial conditions, which it considered as unwarranted.

Standard Chartered

We expect the European Central Bank (ECB) to keep all key interest rates and quantitative easing (QE) programme parameters unchanged at its 27 April meeting. We also expect forward guidance – that QE will continue at the current pace at least until December 2017 – to remain unchanged. The Governing Council (GC) will likely maintain key phrases in the press statement, saying that rates will remain “at present or lower levels for an extended period of time, and well past the horizon of...net asset purchases”, and that risks to the economy remain “tilted to the downside”. Any softening of these statements could signal earlier removal of policy accommodation. The macroeconomic environment has brightened in the past two quarters and markets have begun pondering when the ECB will outline its exit strategy. But underlying inflation pressures are low and risks remain. Several political and geopolitical events could reignite a risk-off environment, most immediately the French presidential elections. We think that changes to President Draghi’s statement may come in June, and the prospect of tapering in 2018 may be introduced, as long as growth stays buoyant and political risks in France fade.

HSBC

We expect no policy changes at the 27 April policy meeting and for the ECB to maintain its forward guidance on interest rates.  After a rollercoaster ride for market rate expectations recently, Mario Draghi and ECB chief economist Peter Praet seem to have quashed expectations of an earlier rate move. There will be no new forecasts published at the ECB meeting on 27 April.  Since the March forecasts, the run of strong soft data in the eurozone has continued but the hard data have not matched this strength. We expect the ECB to stay on hold and reiterate the need to remain cautious, as stressed recently by Mario Draghi. With no policy change expected, the market is likely to focus on forward guidance. Given the underlying inflation outlook, high political uncertainty and the recent comments from Mr Draghi and Mr Praet, we think that forward guidance won't be changed until Q4 2017 and that QE will continue until Q4 2018, with no rate hikes until then.  

Rabobank

We would argue that Mr. Draghi will have to be very careful in choosing his words today. After all, it took quite some effort after the March press conference to “put the market back in its cage” and this could prove even harder if the Governing Council would let go now and succumb to an ‘all lights are green’ view of the world. First of all because the lights on (core and wage) inflation are not green at all (despite a likely uptick in April driven by Easter) and even in European (French) politics nothing should be taken for granted these days. Secondly, because they need to stay in control. Signalling a change in the forward guidance and fiddling with the risk assessment is by no means an easy task because the ECB should maintain sufficient flexibility to take a pause or even a step back. For, once they go down the route of tapering (followed by rate hikes), it may prove difficult to reverse course again. Markets are very good at compressing a host of expected events expected to take place over a protracted period of time into one single market move and that is where the risk lies. Too much of a reaction in EUR (already trading at over 1.09) or in sovereign spreads could ultimately backfire. This, we think, is one reason for Mr. Draghi to keep his composure and try to resist pressures for changing their forward guidance and risk assessment too early in the game. QE was a marathon rather than a sprint; but any runner can tell you that the cooldown is equally important to prevent injuries.

TDS

We’re looking for an upbeat tone overall, as Draghi focuses on the continued strength in economic momentum. The biggest risk of a surprise in our view is that the ECB upgrades the balance of risks to growth from the downside to broadly balanced, to which we attach a 30% probability, as the minutes noted that “a number” of Governing Council members were already leaning that way in March. While markets are widely looking for that change in language to come in June, it would be a bit of a surprise to see it pulled forward quite so much. However, our base case sees forward guidance and all other key language unchanged, and while the upbeat message on growth would normally push the EUR higher, we look instead for a fairly steady range after the big pop higher on the back of Sunday’s French election. We may see a larger move in rates though, which don’t appear to be as stretched.

AmpGFX

Over recent weeks, Key ECB Council members discouraged thoughts that the ECB would shift its QE and rates policy guidance in the meeting this week, countering some comments from ECB member policy hawks in late March that they might support a shift in guidance. The current guidance on rates is still quite dovish (at present or lower levels for an extended period, well past the horizon of net asset purchases). However, it is somewhat contradictory to the removal from its statement that it will use all instruments in its mandate, suggesting lower rates are no longer on the table. The introductory statement is not expected to change, but there is some risk that the ECB tweaks it again.  (Such as describing risks as more balanced, or removing the “or lower levels” from its rates policy guidance). Draghi will presumably lean heavily on the lower core inflation reading in March as supporting the case for maintaining its dovish policy guidance. The market is increasingly focused on the timing of a shift towards normalizing policy.  At the 9 March press conference, the market reacted to any slight wavering in the Draghi commitment to persisting with low rates beyond the QE program end.  He may attempt to deflect any questions by saying normalization of policy were not discussed at the meeting, but it will be difficult for Draghi to unequivocally commit to the current policy guidance.

BBH

Draghi is likely to try to ensure a more dovish message is heard. His pre-weekend comments sketched his views.  He continues to see downside risks to growth and no evidence that inflation is on a rising trend.  Draghi reiterated that he anticipates rates will "remain at present or lower levels" for an extended period.  While no policy change is expected, there is scope to adjust the securities lending program to ease pressure on the repo market.  

Click here to read special preview of the ECB Interest Rate Decision from our in house Analyst Haresh Menghani titled “ECB Preview: time to taper? - Not yet”