How much and what will the ECB do? – ING

Carsten Brzeski, chief economist at ING, suggests that there seems to be a broad agreement at the ECB to do something this week, but the latest comments by several hawks suggest that there still is a heated debate on which policy measures the ECB should implement.

Key Quotes

“The traditional hawks like Jens Weidmann from Germany, Klaas Knot from Netherlands and Sabine Lauthenschläger on the ECB's Executive Board voiced their opposition at least against a restart of QE.”

“In our view, even if the group of QE-skeptical hawks has grown, it still looks like a vocal minority. With inflation expectations probably deviating further from the ECB’s target, there will in our view be a vast majority in favour of new action. And despite the hawks opposition, it is doubtful that only a rate cut will be sufficient. In this regards and to better understand how many at the ECB are currently thinking, a speech by ECB Chief Economist Philip Lane from last week provides interesting insights.”

“According to estimates Lane presented, the ECB’s unconventional measures since 2014 had lifted both growth and inflation some 0.5 percentage points higher. Interestingly, almost half of the impact came from QE. Don’t forget that when the ECB started QE in 2015, the staff projections predicted an acceleration of inflation from 0.5% in 2014 to 1.3% in 2016. Currently, the risk of dropping from an environment of de facto economic stagnation and low inflation into deflation is probably as high as in 2014/5.”

“Therefore, we continue to see the ECB starting a final monetary firework at this week’s meeting: a 20bp rate cut of the deposit rate, a small tiering system, a repricing of the TLTROs and a restart of QE with some 30 billion euro per month. Even though there is the risk that the hawks’ opposition could lead to a delay of QE.”