ECB Preview: Draghi not expected to signal need for more rate cuts

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Jan 21, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Mumbai) - The markets were a little disappointed last month as the ECB had announced smaller than expected stimulus package. The size of the asset purchase programme was left unchanged. However, QE was extended to March 2017 and the central bank also expressed its intention to reinvest the principal payments on the securities purchased to support liquidity conditions. The deposit rate was also slashed by 10 basis points moving it further into the negative territory. ECB Chief Mario Draghi, in an effort to re-assure markets had said later that the central bank would do all that it takes to push up price pressures in the euro zone and that there was no limit to the tools that it can opt for to raise inflation to target.

    The minutes of the December meeting released on 14th January mentioned "The risks surrounding the outlook for HICP inflation were also assessed, on the balance, to remain on the downside." Inflation in the bloc which has stayed near zero for almost three years now is a constant worrying factor for the governing council members who decided last month to retain an accommodative policy in order to spur growth and support the economy. The minutes had also acknowledged the risks posed by the weak emerging market growth which affected the exports of the bloc, as well as other geopolitical risks. Some policy makers had thus demanded more easing measures and had favoured a sharper drop in deposit rates.

    However, rate setters are of the opinion that loose monetary policy alone cannot revive growth. They agreed that euro zone countries were required to put forth policies to foster growth. "A call was made to remind governments forcefully about their responsibility to contribute decisively to rebalancing the euro area economy," the minutes said. Draghi has earlier stressed on the need for “structural recovery” to lift “not just current growth but potential growth as well”.

    Oil prices have dropped by more than 20 per cent since the ECB’s December meeting. With oil at record low the possibility of inflation climbing up to target is diminished and thus inflation expectations have moved lower. The situation at hand raises possibility of a further easing soon. The policymakers do not however look keen to move immediately. They want to wait and watch the impact of the current easing measures play out.

    No change in policy seen

    The research team at Nomura feels the ECB governing council will not introduce any new change in its monetary policy stance. At today’s meeting the council can be expected to gauge and assess to what extent it can stomach the further fall in the inflation rate in the short term given that inflation is expected to stay negative between March and August. It will also possibly discuss when the central bank would begin to consider further easing. The council likely feels that it is too early to judge whether the volatility seen in the markets, both financial and commodity, will have a significant impact on the achievement of its inflation target. Thus Draghi cannot be expected to signal the need for more rate cuts soon.

    Nomura however expects the ECB to reiterate that if situation warrants it will use the available instruments to ‘maintain an appropriate degree of monetary accommodation’. The ECB’s intent to act when needed, together with the sneak-peek of the declining inflation will lead markets to expect more easing this year. The current oil slump looks determined to keep prices in check for some time now and this will build pressure on the ECB to act in the first half of the year. Nomura expects the central bank to ease again in Q2 but it does mention that pressure on the ECB to announce more easing in March will increase as inflation outlook further suffers.
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