ECB Preview: Forecasts from 13 major banks, looking for ways to maintain accommodation

The European Central Bank (ECB) will announce its decision on monetary policy and present fresh economic projections on Thursday, December 16 at 12:45 GMT and as we get closer to the release time, here are the expectations as forecast by the economists and researchers of 13 major banks. 

The ECB is widely expected to leave the interest rates on the main refinancing operations unchanged. More importantly, the ECB is set to take a step toward policy normalization and unveil its plan to retire the Pandemic Emergency Purchase Program (PEPP). 

As FXStreet’s Eren Sengezer notes, a dovish policy outlook could cause EUR/USD to turn south.


“Key December meeting objective: Announce an expected end to the coronavirus crisis phase while keeping policy optionality for both downside and upside scenarios. Our call: Announcement of an intention to put PEPP on hold and raise APP in March along with raising the holding limit of supranational debt. Due to heightened uncertainty, the final decision on APP could be taken in March along with announcing a TLTRO4. ECB to stress that it has proven its ability to intervene if fragmentation becomes an issue and that flexibility remains in the PEPP reinvestments. The latest data and legal issues reduce the likelihood of a post-PEPP envelope. Key risk: Leaving markets with uncertainty over the scale of bond purchases after March, something that could invite volatility in January when issuance is high.”


“The ECB meeting takes place in the context of high uncertainty and deep divisions within the Council. We expect the ECB to terminate PEPP on schedule in March 2022 and commit to net asset purchases post-PEPP only to December 2022.”


“The ECB will stick to its assessment that inflation is transitory. Amidst high uncertainty, the ECB has to balance commitment and stability with flexibility. The December meeting will focus on the modalities of asset purchases after PEPP ends, while other policy decisions may be postponed until early 2022. The 2024 inflation forecast will provide a key hint for medium-term policy. Announcement that PEPP will be terminated by end-March; redemptions to be reinvested. APP will be increased to EUR40 B/month. No changes to the capital key or issuer limit; but a higher share of supranational purchases. Time-based forward guidance on net asset purchases ‘until at least December 2022’. New TLTROs are likely but may be postponed to March. Modalities will be less generous.”


“Major decisions on the monetary policy outlook also longer out were supposed to be taken at the December meeting, but amidst the risen uncertainty and differing opinions, many decisions may now be postponed into early 2022. Net purchases under the PEPP will likely end by the end of March 2022, but buying will still be notable in the coming months. The ECB will probably boost the APP as net PEPP ends, but it is far from certain that it is ready to make the detailed decision next week. The upside inflation risks and elevated near-term uncertainty regarding economic developments make many Governing Council members weary of pre-committing to long periods of time. Staff forecasts will probably show inflation below the target longer out. We see more downside for EUR/USD and upside potential for bonds yields.”


“We expect the ECB to continue to sound cautious about the economic outlook, acknowledging the risk of higher inflation while sticking to the view that inflation is transitory and will eventually return to 2%. In order to gradually start the exit from ultra-loose monetary policy without giving up flexibility amid a fourth wave of the pandemic, we expect the ECB to confirm the end of PEPP in March 2022 and to introduce a third asset purchase programme to smooth the transition. TLTROs will not be extended at their current favourable conditions but instead, the tiering multiplier will be increased from 6 to 10. A gradual recalibration of all emergency measures to prepare for the possibility of more permanent inflation is a very logical step and good risk management at the current juncture.”

Danske Bank

“Inflation has picked up quicker than anticipated while the growth outlook is murky, which we expect will result in a patient approach to monetary policy in 2022, but with the optionality to recalibrate in 2023. We expect the first staff projection for 2024 inflation to land around 1.8%. This combined with real rates hovering around historic lows, allows room for a recalibration. Specifically, we expect PEPP net purchases to end in March 2022, as originally planned. The link between the first-rate hike and the APP is expected to be weakened through calendar-based forward guidance, with APP running until Q4 23 and first-rate hike sometime after that. We expect APP to continue at EUR20/month, and with an additional envelope of EUR250 B that is available with flexible implementation, but with the capital key and ISIN limits still in place. We expect at least a firm indication of TLTRO operations coming in 2022, however, the actual announcement may only come at the February meeting, in light of recent comments from GC members. We expect markets to reprice the front-end in 2022 flatter, but leave it relatively steep in late 2023/2024. Our view may be on the hawkish side of expectations, however, once the initial reaction has settled, we believe markets will realise that this is still a relatively accommodative monetary policy stance.”


“The ECB meeting takes place in the context of high uncertainty and deep divisions. We expect this will lead the Council to only make decisions it cannot postpone (those relating to asset purchases) and to make decisions that require minimum innovation. That would likely mean terminating PEPP on schedule in March 2022, committing to net asset purchases post-PEPP only to December 2022, and carrying over into those residual net purchases from PEPP and reinvestment a promise of flexibility that is unlikely to be implemented in practice. More controversially perhaps, we also expect commitment to post-PEPP asset purchases to extend only to the end of 2022, which would break the link between forward guidance on asset purchases and rates (this could be a ‘hawkish’ surprise). We expect the ECB to try and balance what is effectively phasing out of asset purchases as an instrument of monetary policy by introducing optionality in its communication. But in view of the experience of PEPP, and given divisions within the Council, we remain skeptical that any promise of flexibility will actually be implemented.”


“We expect the Governing Council (GC) to announce the end of asset purchases via the Pandemic Emergency Purchase Programme (PEPP) in March 2022. We forecast purchases of EUR60 B per month via PEPP in Q1 22 (down from EUR70 B per month in Q4 21). We think that the ECB President will indicate that this programme could be reactivated if needed and that the re-investments stemming from this programme could be conducted flexibly across jurisdictions and asset classes. We also expect the ECB to scale up its regular Asset Purchase Programme (APP), announcing an additional envelope of EUR180 B to be used from April 2022 to September 2022 (December 2022 previously).” 


“We look for the ECB to confirm that the PEPP will end in March, and announce a temporary boost to the APP through 2022Q2 to around EUR50 B/mo, with a commitment to revisit the programme later. More flexibility probably won't translate into much EUR support. While the EUR remains oversold and trades at a discount, we look to fade any near-term consolidation. Also keep in mind that the ECB is likely to follow on the heels of a hawkish Fed, suggesting EUR support, if it leads to that conclusion, might reflect an unwind of risk-correlated carry trades rather than a view on policy settings.”


“Amid record COVID-19 case numbers and rising hospitalisations, we expect the ECB will boost APP purchases by EUR20/30 B per month for much of 2022. In our assessment, the probability that inflation will converge on target over the medium term is rising. Fiscal policy is working in tandem with monetary policy, while the changing energy mix, rise in carbon prices and recovering public investment can help inflation reach target sustainably. In the short-term, the diverging policy path with the US can continue to weigh on EUR/USD. Whilst much is discounted, it is difficult to see the dollar’s dominance receding in the near-term.”


“With APP currently running at around EUR20 B per month, we think it is likely that the ECB will announce a modest tapering process by increasing APP to EUR50-60 B per month once PEPP ends. We also know from public comments that many policymakers are against an open-ended timeframe and so the ECB will likely put an expiry date on when APP would return to its regular EUR20 B monthly pace. Unlike the Fed, the ECB is in no hurry to hike rates and so we expect a 12-month period of elevated APP that is gradually tapered after perhaps six months. Recent reports suggest some ECB policymakers want to delay this decision due to the uncertainty stemming from omicron.  While a delay is possible, we think the ECB will reach some sort of workable consensus this week. Of note, new macro forecasts will be released this week and 2024 will be added to the forecast horizon. Inflation forecasts are likely to be raised, while growth forecasts are likely to be cut. The new 2024 forecast for inflation will be a key factor in its forward guidance. If that forecast remains substantially below the 2% target, it would send a very dovish signal on possible lift-off.” 


“Policymakers are now looking at increasing purchases (currently at EUR20 B/mth) under the regular Asset Purchase Program after it puts the PEPP to bed in March. If the amount is increased significantly (example: to EUR50 B), then the timeline for such purchases would be short. If the amount is increased minimally (example: to EUR30 B), then the timeline would be longer. But it will not be open-ended, otherwise, the hawks will not sign on. Whatever the decision, the message on rates will still be clear that a rate hike is unlikely in 2022.”

Deutsche Bank

“The ECB appears on track to initiate a transition to a monetary policy stance based more on policy rates and rates guidance and less on liquidity provision. The ECB is set to confirm that PEPP net purchases will end in March, but will cushion the blow by working flexibility into the post-PEPP asset purchase arrangement. They are also set to make the policy framework more flexible to better respond to inflation uncertainties. One thing to keep an eye out for in particular will be the latest inflation projections, with a report from Bloomberg suggesting that they’ll show inflation beneath the 2% target in both 2023 and 2024. So if that’s true, that could offer a route to arguing against a tightening of monetary policy for the time being, since the ECB’s forward guidance has been that it won’t raise rates until it sees inflation at the target ‘durably for the rest of the projection horizon’.”


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