ECB Preview: Expectations from the first ECB meet of 2016 by 11 major banks

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 (Delhi) – We are just a few hours away from the first ECB Interest Rate Decision of 2016. The following are the expectations as forecasted by the economists and researchers of 11 major banks. After last month’s package of measures, ECB is likely to take a pause in today’s meet and all the 11 major banks are expecting Mr.Draghi to sound dovish and likely to indicate that the door is still open to further easing in the coming months should the situation warrants.


    We expect the ECB to leave its deposit rate and asset purchase programme unchanged. Further easing initiatives would probably damage the ECB’s credibility coming so soon after last month’s package of measures. Mr Draghi will nevertheless surely indicate that the door is still open to further easing in the coming months at the post-meeting press conference. We presently expect further action in Q2 and specifically at the June meeting. If, however, the global environment were to worsen by even more than we envisage, there is a reasonable chance that the ECB could act again as soon as March.


    The latest turmoil on financial markets has fed speculation about new ECB action. However, as the Eurozone currently seems to be in the calm eye of the current storm and Draghi already had problems uniting the ECB for the December decision, we believe the ECB will keep the few powders still left dry this week. Nevertheless, markets still see Mario Draghi as their monetary James Bond and believe in a strong “never say never again”. This means that at least for this week, it will be sufficient for Draghi to sound dovish and to stress the ECB’s readiness to act and to use all instruments available.

    Danske Bank

    We expect ECB to express a patient view on Thursday and given the market pricing of additional rate cuts, the meeting could likely be a disappointment if Draghi does not point to further rate cuts. That said, we expect Draghi to continue to express a somewhat worried tone regarding especially the inflation outlook, implying markets are likely to continue to anticipate more easing from the ECB for some time. If we are right that the ECB will disappoint by not being willing to signal the need for another deposit rate cut, EUR crosses should see some support post the meeting.


    We don’t anticipate any changes to policy at this week’s ECB meeting. Beyond repeating the themes from December’s minutes , we could see President Draghi acknowledge the risks to their inflation forecast from lower oil prices (echoing the BoE, and saying they’re ultimately a good thing in the medium-term ) while also expressing concern that lower inflation will keep real interest rates higher.


    ECB meeting to signal bias to ease, but unlikely to be enough to trigger EUR selling There are a number of reasons why our economists believe the ECB is likely to refrain from additional policy easing, including the opposition of some policymakers to further action evident in the minutes of the December meeting and more encouraging economic data. The press conference should signal a bias to ease, but President Draghi will likely be keen to avoid raising expectations too much for the time being.

    Lloyds Bank

    Research Team at Lloyds Bank, suggests that as the ECB (Thu) is likely to leave policy unchanged, market attention will focus on President Draghi’s press conference for clues about further potential loosening.


    Although we do not expect any changes to policy, the meeting is important for assessing the tolerance level within the Governing Council to the significant weakening in the (short-term) inflation outlook that has taken place and the earliest point at which the ECB is willing to make a “reassessment” on further easing. We expect a similar position to September 2015, with the ECB noting that renewed downside risks have emerged to the outlook for growth and inflation. However, we expect the Governing Council at this stage to judge it premature to conclude whether the renewed sharp fluctuations in financial and commodity markets will have a lasting impact on the achievement of a sustained adjustment in inflation. Overall, we expect the easing bias to remain, with the Governing Council repeating it is willing and able to act by using all the instruments available within its mandate to maintain an appropriate degree of monetary accommodation.


    The ECB is likely to maintain a dovish tone, promising to ease further if needed, but without signs of a slowdown in growth we expect little further ECB action this year. In our baseline scenario, we expect the deposit rate to be cut by another 10bp in March and the TLTROs to be extended until mid-2017, while asset purchases are expected to continue until the end of 2017, at a tapered pace as of March 2017.

    Deutsche Bank

    We expect neither a change in policy nor a clear signal of further easing. We do however think that the Council will highlight its capacity to act, the ‘open-ended’ nature of its policies and the flexibility around the asset purchase programme. Our colleagues take the view that the ECB will be reactive in addressing the risks to its inflation mandate and will wait for more visibility on the three key fronts; China, the oil price shock and inflation expectations.


    As the ink of the previous easing package has barely dried, we expect no ECB action. The hurdle to future measures is significant, but a sharp cut in the March projections for inflation will be difficult to ignore. A 10bp deposit rate cut in March may therefore prove the path of the least resistance.


    We expect the ECB to deliver a dovish policy message today. The ongoing decline in the price of crude oil, weakening outlook for growth in emerging economies and further softening of inflation expectations have all increased downside risks to the outlook for inflation in the euro-zone. We do not expect President Draghi to explicitly signal today further easing is likely at their next policy meeting although the tone will be dovish which may initially weigh modestly on the euro.

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