ECB Preview: Gradual dovish shift – ABN AMRO

Analysts at ABN AMRO think that there will be a significant dovish shift in the ECB’s tone and forward guidance over the coming months, but this will probably only happen in steps, with the coming meeting representing the first modest step.

Key Quotes

“At the upcoming meeting we expect the following:

(1)    Moderate reductions in economic growth and inflation forecasts. The ECB seems to be sticking to its base case for the economy and blames much of the weakness on temporary factors. In addition, in recent commentary, ECB officials seem to be holding on to the idea that underlying inflationary pressures will build significantly. However, we see room for more significant downgrades in the first half of next year as economic data make it clear that there is a more fundamental export-led slowdown in train (for more on the projections, please see below).

(2)    Unchanged guidance on policy interest rates. In line with the view that the ECB will largely stick to its base case for the economic outlook, it will unlikely alter its forward guidance on policy rates next week. We expect a change in the forward guidance to come by June of next year, when the Governing Council will signal that it expects policy rates to remain unchanged at least through 2019.

(3)    End of net purchases but clearer guidance on reinvestments. We think that the ECB will almost certainly announce that it will end net asset purchases this month. Given that purchases for a number of countries are constrained by issue(r) limits it cannot continue in any case. However, it may provide more information about its reinvestment policies. For instance, it may imply a longer period of reinvestments, by stating they will continue ‘well past’ the period of unchanged policy rates. In addition, it may give itself more flexibility to reinvest the proceeds of maturing securities within a longer time frame than the subsequent two months as currently the case.

(4)    No announcement yet on TLTROs. We do not think the ECB is ready to announce any changes to the TLTRO programmes. Discussions appear to still be at an early stage. We expect changes to the TLTRO programme in March, to allow banks to repay the funds over a longer period than currently.”


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