ECB Preview: Forecasts from 12 major banks, dovish tone amid Delta force

The European Central Bank is set to strike a more dovish tone this  Thursday following its strategic review. Here you can find the forecasts by the economists and researchers of 12 major banks regarding the upcoming ECB July’s meeting.

See: Three reasons to expect the ECB to trigger EUR/USD falls

SocGen

“As the new target is only marginally higher, with no targeted overshooting, we see limits to further policy easing. However, we could see some dovish changes to the forward guidance to demonstrate the need for persistence. The key message could be that there is no rush to signal tighter policy, even at the September/October meetings. We only expect a better understanding of the possible end of the crisis phase of the pandemic late this year, suggesting that the key decisions on PEPP may only come then. Currently, we see the PEPP ending in March 2022 or slightly later and transitioning to a higher APP in 2Q. To create a policy room, we could hear more about the issuer/issue limits. However, with the risks of distorting prices and debt restructuring efforts at more long-term holdings above the 33%, we see limited room for adjustment. Longer-term, we worry that a more ambitious target without new tools or changes in the underlying inflation dynamics will feed into an ever-larger balance sheet.”

ING

“We don’t think the ECB will go as far as actually stepping up its bond purchases given the hawks at the ECB were already suggesting a reduction of the asset purchases at the June meeting. But given that the delta variant and new waves of covid in several eurozone countries cast enough uncertainty for the hawks to keep silent until the September meeting, stepping up bond purchases would clearly be a step too far. There is little to change in the forward guidance on rates. Instead, the ECB could prepare its own operation twist, linking the APP closer to the inflation target, which would open the door for reduced PEPP purchases and, at the same time, increases of the APP purchases. Another important point could be clarifying the ECB’s definition of the end of the ‘coronavirus crisis’. We expect a very heated debate behind the scenes. On top of the new strategy, the ECB is also facing a new inflation reality, in which views on the risks of second-round effects and the pass-through from higher producer prices to consumer prices clearly differ, to say the least.”

Nordea

“The ECB has the potential to deliver a mildly dovish surprise. It seems that we have all the building blocks from the new strategy and we have Lagarde’s hints but lack the clarity of the actual implementation of the forward guidance.”

Danske Bank

“We do not expect new policy signals coming from the change in language. We expect an acknowledgment of the improving data which has come in according to expectations and the positive contribution from the roll-out of the vaccines, however, risks will also be mentioned, notably, the by-now dominating Delta variant with a reference to still uneven and fragile recovery. With markets having to adjust to the new communication style and potentially also new language, there are risks of larger than usual market moves, although such moves should not be over-interpreted, especially in a less liquid seasonal summer market. We expect new policy signals after summer on issues such as bond-buying, but are open for TLTRO liquidity operations to be coined standard already at the upcoming meeting.” 

Rabobank

“The new strategic framework should not lead to immediate changes in the policy stance. However, as of this month, the format of the meeting’s proceedings will be updated. That may lead to a slightly more dovish forward guidance, particularly on policy rates, to indicate that the ECB will persist in its monetary accommodation. There is a small risk of more significant dovish changes to the guidance, including a potential formal indication of a transition phase after PEPP ends. We expect the deposit rate unchanged at -0.50%, APP steady at EUR20 bn/month and the PEPP envelope unchanged at EUR1,850 bn. By end-2021, the ECB will probably announce how PEPP will transition after March. We believe the focus may shift to (higher) APP and other ‘more standard’ unconventional tools.”

TDS

“We look for a change in language to the ECB's forward guidance at the July meeting, in order to emphasise the themes of persistence and forcefulness, in line with what President Lagarde has hinted. However, given how far into the future markets are still pricing ECB rate hikes, we don't think that the July change in language is likely to have much market reaction and that the more important issue for markets will be any hints around what's to come at the September meeting. We see notable two-way risks in EUR/USD for the July meeting, suggesting global investors may be best served by a wait-and-see approach. While their policy cues are likely to be dovish, these expectations may already be fully priced. Beyond this, we generally expect spot to remain confined to familiar ranges overall unless and until fresh catalysts emerge.”

Deutsche Bank

“We expect some changes to forward guidance and communications around the new average inflation targeting unveiled earlier this month. So an interesting first event in a brave new world/same old world (delete according to your view) for the ECB after their review.”

MUFG

“We expect the ECB to maintain a cautiously optimistic outlook for the economic recovery in the eurozone but continue to acknowledge downside risks posed by the spread of the Delta variant.”

Credit Agricole

“The updated policy framework should make the Governing Council more committed to its dovish policy stance. In particular, this would imply using PEPP and APP, as well as keeping rates low for longer than before. A confirmation of this view by President Christine Lagarde would reaffirm the market’s perception that the ECB has turned more dovish and thus boost the appeal of the EUR as a funding currency.”

SEB Bank

“Following the release of new monetary policy strategy last week we expect it to be the main focus of the July meeting. Lagarde will have to look forward to questions surrounding new symmetric 2% inflation target. ECB’s tolerance of inflation overshooting and tools to achieve the more ambitious target. We do not expect new measures to be presented at the July meeting but regard it as possible that a new flexible post-pandemic purchase programme with a more explicit link to policy goals could be launched at a later stage. We expect the general tone of the meeting to be dovish but only with minor market reactions.”

Citibank

“We expect no change in key ECB rates. With respect to rates guidance, we expect some adjustments to reflect conclusions of the recent Strategy Review and look for the ECB to link rate hikes to the achievement of price stability while allowing for some temporary overshooting of the target. We also expect some reference to a consistent rise in underlying inflation dynamics though it is much less clear that there will be a consensus on the immediate need for the calibration of asset purchases as there would be a need for a continued high degree of flexibility. It might therefore be easier for the Governing Council to wait until September when updated ECB staff economic projections become available to fine-tune the calibration of the response, or even wait until Dec when the first estimate of 2024 HICP will show whether the post-pandemic rebound and forward guidance adjustments have been sufficient to help with the re-anchoring of inflation expectations.”

ABN Amro

“We think that the ECB will strengthen its forward guidance to signal a longer period of unchanged policy rates and net purchases under the APP than markets currently expect. It will also signal that it is willing to increase the APP going forward and change the modalities to increase its room for manoeuvre if needed. However, concrete steps in terms of the latter will likely wait until the September or even the December meeting. There is a risk that the PEPP is extended beyond March 2022 because of the risk that the  Delta variant disrupts or even reverses the opening up of economies. However, that is not our base case.”