Wednesday, 23 January 2019
Tomorrow, we have an all-important ECB meeting, and as we get close to the decision timings, here are the expectations as forecasted by the economists and researchers of 8 major banks for the upcoming meet.
Most of the researchers and economists are forecasting, that the *ECB will likely keep both rates & forward guidance unchanged this week, but at the same time, are suggesting that the balance of risks has turned to the downside*.
“We expect the ECB to leave policy on hold this week, and importantly to leave its forward guidance intact that rates will remain at their current levels until after this summer.”
“On the surface, developments in the euro area since the ECB's December forecasts suggest a pivot in risks to the downside. Inflation lies sharply below their implied December forecast (though mostly on the back of lower oil prices), and growth in the final quarter of 2018 likely came in at half the ECB's projected pace.”
“We expect them to look through lower energy prices, treat recent activity disruptions as temporary, and therefore leave risks unchanged from December, but the risks to our call are clearly tilted to the downside.”
“The overall tone of the opening statement & presser should therefore sound cautious but constructive. The dovish risks we highlight are unlikely to materialize before mid-year.”
Given the disappointing economic data flow, we think the ECB will finally shift its assessment of the balance of risks to being tilted to the downside at its meeting later this week.”
“Since December, the economic data flow has remained weak, and at 1.7%, the ECB’s economic growth forecast for this year looks very optimistic. We think that this would be a signal of further downgrades to the central bank’s economic growth and inflation projections in its next economic update. This will set the scene for a change in its forward guidance by the June meeting. Indeed, we expect the Governing Council to change its forward guidance on interest rates to signal that it no longer expects to raise its policy rates this year.”
“Meanwhile, we also expect the ECB to hint that it is preparing to announce changes to its TLTRO programme going forward. We think that the ECB will announce an extension of its TLTRO programme. In the current context, we see this as mainly trying to ease refinancing problems for Italian and, to a much lesser extent, Spanish banks.”
“The ECB is expected to leave monetary policy unchanged at its January meeting while confirming that the balance of risks has turned to the downside. The cautious tone could be reinforced on the back of disappointing data, some moderation of inflation expectations and growing risks due to global concerns and euro zone slowdown, despite the stabilization in financial markets and the partial easing of concerns about protectionism.”
“The ECB could acknowledge that risks are now tilted to the downside, an additional dovish tweak to the tone at the December meeting, when the central bank admitted that the balance of risks was moving to the downside. In this way the ECB could open the door to altering its forward guidance on rates in the coming months.”
“Regarding other monetary policy issues, the central bank should give some clues about the possibility of a new LTRO. At this meeting any announcement may be still premature, as at the last meeting Mr Draghi revealed that the committees had just started work on liquidity issues.”
“We expect the ECB to announce an extension of TLTROs by March or June 2019, in order to avoid a liquidity cliff in the coming year (when a large repayment of past TLTROs should take place)."
“We expect Mario Draghi to strike a precautionary tone in order not to move markets. Given the current market pricing, we do not expect the precautionary tone to lead to a significant dovish market reaction to the meeting.”
“The hotly debated growth risk assessment is set to take centre stage. At the previous meeting, the ECB coined the growth risk assessment as broadly balanced but moving to the downside. Since then, we have seen a string of disappointing data, which is also visible in the surprise indicator close to the lows reached around the sovereign debt crisis.”
"Based on the Council’s growing concerns about potential negative side-effects, we still anticipate a first, cautious 10bp deposit rate hike in September."
“For the ECB that means that the Council will stick to its plan and not change its storyline until this really becomes untenable. We certainly don’t think this is the case in the January meeting yet especially considering that the ECB’s forward guidance already offers flexibility to delay the first rate hike if this proves necessary."
“So considering the lengthy discussion in December, we believe there is currently insufficient new evidence to tweak this balance again. Therefore, we believe the ECB will not change its policy or communication at this stage, as the Council awaits more incoming information and the new staff projections available in March.”
“We judge that the balance of risks has shifted further to the downside since the ECB’s December meeting and expect the ECB to change its risks assessment at its monetary policy meeting on 24 January.”
“However, the further weakening of the outlook has probably not dented the ECB’s optimism regarding the inflation outlook significantly, and the central bank is not about to announce new easing measures.”
“We expect the ECB to offer at least some bridge operations from the old targeted longer-term refinancing operations (TLTROs), starting in June 2019. Given especially the continued problems in the Italian banking sector, several banks would face difficulties without any bridge operations, when the remaining maturity of the first set of the TLTROs falls below one year in June.
“We do not expect any announcement on new liquidity operations until the March meeting, at the earliest. However, Draghi could reveal the discussion on the matter has started.”
“Thursday’s ECB meeting will probably be low on action but high on controversial debates and challenging questions.”
“For the time being and despite the loss of growth momentum, the ECB seems to follow the view that the eurozone economy is in an intermediate phase of slowing but not contracting. This means that the ECB will play for time, in our view. The situation is not (yet) threatening enough for the ECB to return to crisis mode, nor is there a quick-win instrument left in the ECB’s toolbox.”
“Consequently, we expect ECB President Mario Draghi to leave the ECB’s forward-guidance on rates unchanged, while at the same time, adding a dovish note by stressing the ECB’s data-dependency and downside risks to growth.”
“In the meantime, an option to make the current dovish bias a bit more credible could be to signal the ECB’s willingness to conduct new longer-term liquidity operations, for example, by announcing on Thursday that the Governing Council has tasked the relevant committees to look into ways to tackle possible liquidity shortages and to investigate the impact from the negative deposit rate on banks.”
“In December, the ECB ended net asset purchases and repeated the forward guidance that key policy rates will remain on hold “at least through the summer of 2019, and in any case for as long as necessary”.”
“In 2019, the ECB remains cautiously confident. Earlier last week, Draghi gave an upbeat description of the economy: "consumption is still expanding, relatively strong, investment still expanding, supported by our monetary policy, export growth is less, but still good. And the labour market keeps on being very strong." Yet, he also noted geopolitical uncertainties may continue to weigh on sentiment and drag growth below trend. The ECB will likely need further information before giving more guidance. We see a straight bat ahead of March's meeting and projection update.”
*Click here* to read more about the *ECB preview* from our *European Chief Analyst, Mario Blascak and *titled “*ECB Preview: With lower growth ahead, chances of a rate hike in 2019 are all gone*”**