European Central Bank Preview: Forecast from 14 major banks

The European Central Bank (ECB) is set to announce its Interest and Deposit Rate Decision at 12:45 GMT and as we get closer to the release time, here are the forecasts by the economists and researchers of 14 major banks, regarding the upcoming ECB meeting.

Economists expect the central bank to leave its policy unchanged, but some suspect that the Frankfurt-based institution will respond with new measures, implementing an economic hit and act by enlarging its Pandemic Emergency Purchase Program (PEPP). The ECB could also opt for a hint of action in December when staff release new forecasts. Christine Lagarde, President of the ECB, will meet the press and will also be asked about the bank's strategic review and the option of cutting rates.

Ahead of the meeting, the EUR/USD pair is nearing October monthly low at 1.1688 after ranging for the fourth consecutive week, with the top of such a range set at 1.1880. 

ABN Amro

“We think the ECB will hold off from a new stimulus this week but we expect the Governing Council to signal strongly that it is very likely that stimulus will be announced in December. We think that asset purchases under the PEPP will still very much be the central plank of the package. The ECB could decide on further measures to support banks. The TLTRO conditions could be further eased, while the TLTRO rate could be cut further. In addition, the ECB may well decide to increase the multiplier for the calculation of the allowance of excess reserves that banks can hold free of charge. An increase in the tiering system ratio could modestly reduce the burden of direct costs to banks from negative interest rates. With excess liquidity surging and interbank rates having fallen sharply, the case for this move is strong. Finally, we do not expect a reduction in the deposit rate. Although the ECB has kept the option of a cut in the deposit rate open, the Governing Council has refrained from using it. It seems that a deposit rate cut would only be considered seriously as an option in the case of an ongoing sharp appreciation of the euro. However, the euro’s upward trend has fizzled out over recent weeks.”

Wells Fargo

“We do not expect a policy change at that meeting, though the ECB will likely offer a more cautious economic assessment. The chance of further easing may be rising; however, it is not yet our base case. If the Eurozone recovery fails to gain sustainable traction, the central bank may feel compelled to ease further during the first half of 2021.”

Rabobank

“We expect interest rates on hold for the foreseeable future. Risk of a cut remains, and it would be effective in weakening the currency. However, we think EUR/USD would need to be closer to 1.20 before the ECB sees it as restrictively strong. We still foresee a higher tiering multiplier, but we expect the ECB to wait until more of the PEPP has been implemented (or a rate cut does materialise). A rate cut may also require a tweak in the TLTRO modalities to limit the potential downside. We expect no changes to the APP or PEPP just yet. We still call for an extension of PEPP to end-2021 in December, paired with a EUR ~250 B increase in the envelope.”

ING

“We don’t expect the ECB to show its cards. The controversies within the Governing Council on what to do next are still quite strong. However, recent economic developments have clearly strengthened the case for the doves. We anticipate an increase in the PSPP envelope in December, rather than an increase in the PEPP. Christine Lagarde could definitely present some hints. Even if some might argue that recent months have shown that the real communication action is no longer taking place at the press conference but in the blog entry the day after.”

Nordea

“The pressure on the ECB to ease further has increased, but we still do not expect another easing package until the December meeting. There is no immediate rush to do more, with plenty of capacity left in the tools already unveiled, while the December staff forecasts will provide valuable information in helping to calibrate new easing. A dovish message should still be expected next week. If the ECB unveils a surprise easing package already at the October meeting, bonds would rally, spreads narrow and the EUR/USD fall.”

Danske Bank

“We do not expect any new measures to be announced. However, with the COVID-19 spreading increasing, we expect the ECB to send its usual dovish signals, which could raise further market expectations for a December decision to increase/extend PEPP due to its open interpretation of the language. Our baseline is for the ECB to signal a readiness to act subject to incoming data in the coming six weeks and not a pre-commitment to expand already next week. ECB may show its commitment through a PEPP extending beyond June 2021. We do not expect markets to react strongly to the press conference. We expect European fixed income will continue to trade in its tight range (Bunds range between -65bp and -40bp), while ECB is not a game-changer for the EUR/USD.”

Deutsche Bank

“We expect the ECB to leave the policy stance unchanged at the next Governing Council meeting on 29 October. With a second wave of COVID-19 infections rising, we expect the ECB to warn of growing downside risks amid an already weak outlook for inflation. This will open the door to an easing of policy in December. Currently, we expect a composite easing strategy by the ECB in December: more PEPP, in one form or another, to address the pandemic risk and more APP to address the persistent low inflation problem. This approach would soften the PEPP 'cliff' in mid-2021 and add a stimulus 'ramp' as insurance during a long-lasting and vulnerable post-pandemic recovery. Pushing back the cliff without building the ramp would only partly resolve the inflation problem.”

TDS

“We don't look for any new policy announcements at the October meeting. We do, however, expect the ECB to acknowledge the growing risks to the growth and inflation outlook on the back of rising Covid cases and regional lockdown measures. We look for Lagarde to leave the door wide open to augmenting the PEPP in December, which most analysts are now expecting. With the US election coming hot on the heels of the October ECB meeting, we do not expect to see a significant directional move in EUR/USD. We expect spot to remain anchored within familiar ranges through Nov 3 but for EUR/USD to resume its grind higher after amid broader USD weakness if our base case is confirmed.”

SEB Bank

“Preparing for a policy expansion. Stalling growth momentum and the all-time low core inflation put pressure on the ECB to expand its policy further. We see PEPP expansion and a new series of TLTROs with even more attractive terms as very likely. Our main scenario is that the ECB will wait until December to get the new staff projections and more clarity on Brexit before introducing new measures. However, the September projections seem already now too optimistic and the ECB could act already on 29 October by introducing more attractive TLTRO terms. President Lagarde failing (again) to indicate further policy expansion next week is likely to result in an adverse market reaction.”

JP Morgan

“With COVID-19 infections rising sharply, the ECB meeting has become much more interesting. This is not because much is expected in terms of actual decisions. In fact, we still think that there is only a chance of some changes to TLTRO-III modalities and tiering multiples. Instead, the meeting will give the ECB an opportunity to take stock of the recent data and COVID-19 news, and possibly offer some guidance about the December meeting when new staff forecasts will be available. We continue to think that the ECB will in December announce an expansion of PEPP by another €500 B and that it will have to follow this up in mid-2021 with another increase of €250 B. The ECB will obviously sound much more concerned about the economy, but there is still a huge amount of uncertainty about the near-term outlook and therefore the ECB may also play for time. The ECB may refrain from sending a very clear signal about December, even if it does suggest that some further support will come. In this context, the meeting will offer ECB policymakers a chance to discuss the fundamental policy strategy, given that there still seems to be a lot of disagreement about Philip Lane's two-step approach to inflation.”

Credit Suisse

“We are expecting a €300 B expansion in PEPP capacity to be announced at the 10 December meeting, highlighting the steady tone of market-based inflation expectations, tight levels of European peripheral spreads, proximity to US elections and lack of broad market stress as reasons for the ECB to hold off on any new policy announcements at this week’s meeting. The recent successful raising of funds under the SURE program, and the prospect of imminent disbursement to states facing renewed Covid stress also adds to the reasons for expecting no further accommodation from the ECB this week. The one area where markets might see potential for new announcements is on the TLTRO front, where a cut in the rate at which banks can borrow long-term (currently at -1.00%, below the depo rate at -0.50%) is a possibility, in the light of the reduced demand for credit that emerged from the Q3 ECB Bank Lending Survey. The FX implications of such move are however likely limited, in absence of an actual cut in the depo rate – a fairly remote possibility at this moment. Similarly, validation of the market’s expectations of increased asset purchases later this year is unlikely to result in increased EUR directional bias. In absence of changes on the TLTRO front, and with no forecast revisions planned for this week’s meeting, market focus will remain firmly on President Lagarde’s language, which is expected to remain dovish. This time President Lagarde may point to the stronger tone of Asian currencies as a new factor relieving upside pressure on EUR on a trade-weighted basis.”

Citibank

“Citi analysts expect no decision of substance taken (though expect Council to hint at the likelihood of policy easing in December by increasing the overall residual envelope of PEPP (by a minimum of €500 B) & its timeline (by another 6M).”

Nomura

“We expect the ECB to leave its monetary policy unchanged. We maintain our view that the next policy move will be in March 2021, when we think the ECB will increase its PEPP envelope by an additional €400 Before that we expect the ECB to step up its weekly PEPP purchases into the winter as the euro area economic recovery falters as a result of more restrictive lockdown measures. Over the past two months, ECB communications have generally been, in our view, less dovish at the margin, and we expect this to be the case at next week’s press conference.”

BofA

"The ECB should express its concerns in this week's meeting. The COVID-19 situation is fragile, and the cold weather season has barely begun. It is unclear if recent restrictions are enough. Eurozone core inflation is likely to weaken further from already historic lows. Brexit remains unresolved and the recovery fund could be questioned and delayed. We could do with certainty that more ECB support is coming in December. Committees being tasked would be a very clear signal, but maybe that is expecting too much this week. In this context, we do not expect much from the ECB this week. A signal for PEPP expansion in December should already be mostly priced in, with risks for disappointment. Any indication for open-ended and inflation linked-PEPP would be a market surprise but, again, the communication for such a move would be important to determine the EUR impact. In any case, we believe that in the short-term the EUR depends more on global-COVID-and US-elections-factors, than the ECB. The EUR is not currently overvalued in our view-our EURUSD equilibrium estimate is 1.23-but the recent collapse in Eurozone inflation would justify a weaker EUR.”