ECB Preview: 8 Major Banks expectations from September 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 8 major banks from the upcoming meet.

Most of the banks not expecting the ECB to announce any major changes to its policy parameters, while markets will be looking for any information on how the discussions on the future of QE have gone, and what the ECB might be thinking on how quickly it could wind down asset purchases. Also, ECB meeting provides new staff forecasts which will be closely watched as well. In addition, the comments that comes through in President Draghi’s press conference will be very closely examined as Draghi is expected to strike a cautious balance between giving the first clear hint at upcoming tapering and adopting a dovish tone in order to calm the FX market.

Nomura

We are not expecting too much new information to emerge from next week’s ECB policy board meeting. There will probably be an acknowledgement, however, either in the statement or from Mr Draghi at the post-meeting conference that an announcement about the APP will be made at the following meeting in October. The key macro focus at this meeting will therefore be the update of the ECB staff forecasts. We expect modest upward revisions to the GDP growth projections for 2017 and 2018. However, notwithstanding this, there will likely be a mechanical downward adjustment to next year’s inflation forecasts in light of the strength of the euro in recent months. Relative to the technical assumptions that the ECB deployed at the time of its previous forecast update in June, the trade-weighted euro exchange rate is about 4.4% higher. Oil prices are also a little lower. The impact of this on the inflation forecasts will be partly mitigated however by stronger growth than previously assumed and the impact of this on the euro area output gap. The other focus will be on Mr Draghi’s comments on euro appreciation. Although the ECB is cautious about financial market tightening, we expect Mr Draghi to not make direct verbal interventions to depreciate the euro. Finally, the tweaking of forward guidance on the asset programme may be in focus as well. There was a suggestion to change it at July’s meeting. However, we expect forward guidance on the asset programme to be maintained because the ECB will want to avoid sending messages that could cause an over-interpretation from the market. 

TDS

The focus today though will be on the ECB’s midday decision, where markets will be looking for any information on how the discussions on the future of QE have gone, and what the ECB might be thinking on how quickly it could wind down asset purchases. We see this ECB meeting precariously positioned around the nuance of what the Governing Council can agree on, and when. This makes for poor risk/reward to pre-position for an outcome. Under our base case, we see the market mildly selling the EUR on the policy decision as the hawkish tail risk fails to materialise, with this pushing further into the prepared remarks, when Draghi downgrades inflation forecasts and cites EUR strength as the main reason. But in that case, we would expect Draghi to be more balanced in the Q&A, which would likely set up for a squeeze higher from the lows in EURUSD. Draghi’s two options in our view to prevent this and sustain a lower euro on the day are to either (1) inject the “unwarranted tightening” terminology in his discussion of the currency or (2) significantly reinforce the ECB’s sequencing of policy options to make clear that they have no intention of hiking the depo rate any time soon and help Euribors price out some tightening priced in for 2018/19. Otherwise, the center of gravity for EURUSD is higher if Draghi tries to be more balanced. The EUR’s recent rise has seen European equities underperform and real rates decline significantly; we would expect a somewhat perverse market reaction where a dovish Draghi causes EUR↓ and drives rates↑.

ING

The stronger euro has made the ECB’s taper tiptoeing even more complicated. While a clear hint on tapering at this week’s meeting could send the euro even higher, potentially undermining the recovery, room to postpone tapering is limited due to bond scarcity. Therefore, we expect Draghi to strike a cautious balance between giving the first clear hint at upcoming tapering and adopting a dovish tone in order to calm the FX market. Dovish tapering, if any, will be to escape the euro trap. With the stronger euro, the ECB is likely to be more cautious with its tapering communication. In fact, there are two options: either announce the details of a very dovish tapering starting January 2018, this week, hoping that full clarity restores calm, or strike a cautious balance between giving the first hint at upcoming tapering and adopting dovish tones, such as warning against unwarranted tightening of financial conditions in order to calm FX markets. As the ECB is probably not yet unanimous on the first option, we expect that Thursday’s meeting will again be about what Draghi did not say, rather than what he did.

ANZ

We do not expect that the ECB will make formal shifts to policy at its September meeting; however, ECB President Draghi is expected to talk ‘tapering’. Expectations are high and risks are asymmetric, especially considering Draghi may try to keep euro strength in check. While strong momentum in the euro area suggests the rally in the EUR is justified, positioning and expectations suggest to us that better levels from which to buy are coming.

Danske Bank

The main focus at the ECB meeting is likely to be how big a problem the current pace of euro appreciation is for the ECB. We expect Mario Draghi to express concern about this and explicitly mention that the stronger euro is the main reason the ECB has lowered its inflation projection and that there is further downside risk. That said, Draghi will still have some hawkishness in his tone in our view. This is because growth momentum remains strong, which has previously been one of his arguments for why inflation will rise eventually. However, as Draghi said in July, a financial tightening is ‘the last thing’ the ECB needs. Although we do not yet expect the ECB to announce any decision about how QE will continue beyond the currently communicated horizon, we believe there will be a lot of discussion about the future QE path. Overall, we still believe the ECB will continue its QE purchases but at a reduced pace of EUR40bn per month in H1 18. We expect it to announce this at the next meeting in October but with some signalling of it at the upcoming September meeting. An argument for signalling a QE continuation should be a downward revision to the ECB’s inflation forecast. We expect a modest reduction to 1.2% in 2018 and 1.5% in 2019 (0.1pp lower both years) driven by the euro appreciation. Together with these small downward revisions, we expect Draghi to highlight further downside risk to the outlook due to the stronger euro. Related to this, the ECB should not express too much excitement about the latest inflation prints, as wage growth remains weak.

BBH

The ECB meeting provides new staff forecasts.  The supposed leaks warn that GDP growth may be tweaked higher, but inflation shaved.  Lowering inflation forecasts is more dovish than raising GDP is hawkish.  Barring a hard stop, which has been dismissed as potentially disruptive, the ECB must extend its purchases.  The evolving language of the ECB's statement suggests a tapering.  We suggest that the consensus view of a reduction of monthly purchases to 40 bln euros for six months would be a dovish signal, as it points to continued purchases in H2 2018, while a cut to 30 bln euros would give officials flexibility to end the program at mid-year. The failure of the ECB to make such an announcement today could spur pullback in the euro, but it may prove short-lived if the delay is just until next month.  There is little doubt that Draghi will address the strength of the euro.  And even if he discusses it in his prepared remarks, surely reporters will pepper him with questions about it at the press conference.    Draghi, as other ECB officials have done, will likely recognize that part of the euro's appreciation is a function of better economic and political prospects in the euro area.  We imagine he will also caution that continued appreciation could pose a headwind to the recovery.

Natixis

Mario Draghi had announced that the coming recalibration of the APP would be discussed in the Fall and that it would in his opinion start on 09/07. We should therefore at the very least know a little more today. There will be a discussion because the decision is expected today, or at the very latest, the month after, in order to prepare the markets for tapering to begin in January 2018. The asset purchasing program will certainly be extended:  when you consider growth acceleration and inflation being up (1.5% in August vs. 1.3% in July) on the one hand, and a sharp increase in the euro (another +5% in July/August) and geopolitical uncertainty on the other, its length is much less certain. M. Draghi, we’re all ears. 

Westpac

President Draghi put off speaking on the topic of monetary policy at the Jackson Hole Symposium, instead choosing to focus on the long-term concerns of confidence and productivity. Before and after that engagement, the Euro continued to rally past USD1.20. To our mind, the ECB Governing Council is not overly concerned about the current level of the currency, but a further jolt higher is certainly not desired. Come September, the market will be focused on guidance on a 2018 taper and forecast revisions. To hold off a higher Euro, the Council needs to emphasise that the taper process will be slow and that rates won't rise until well after it is completed. Note it is not a given that hard detail on the taper will be provided in September; the Council may wait until October or December.

Click here to read special preview of the ECB Interest Rate Decision from our Chief Analyst Valeria Bednarik titled “ECB Meeting: Draghi vs. The Market wrestling, who will win?”