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Draghi and ECB may become less dovish despite lack of policy change

EconomyJun 08, 2017 04:02AM ET
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© Reuters. Experts looking for ECB to remove the possibility of even lower rates – While the European Central Bank (ECB) is widely expected to not make changes to its monetary policy at its policy announcement on Thursday, analysts forecast that the central bank and its president Mario Draghi would adjust its outlook and take a less dovish stance on the future.

The ECB's latest interest rate decision is due at 7:45AM ET (11:45GMT) and is forecast to leave the benchmark interest rate, the deposit facility rate and its marginal lending rate unchanged at 0.0%, -0.4% and 0.25, respectively.

Furthermore, the monetary authority is expected to maintain the size of its monthly quantitative easing program at the monthly pace of €60 billion ($67.5 billion) until the end of December 2017, “or beyond, if necessary”.

With economic growth clearly shifting into higher gear and political risks declining, investors will look for clues on when and how the ECB could scale back its massive asset purchase program.

In that light, most of the focus will be on president Mario Draghi's press conference 45 minutes after the initial announcement.

A recent Reuters’ survey of economists showed that less than 10% expected the ECB to drop the possibility of increasing those purchases.

ECB could highlight that risks are now balanced

However, almost 90% of the respondents who answered an extra question said the central bank is likely to change its guidance or risk assessment at the June 8 meeting.

Amid changes to language, experts are widely expecting the ECB to recognize recent improvements to the outlook.

Economists at ING are looking for an upward revision to the outlook for gross domestic product (GDP) growth of close to 2% for this year through 2019.

Morgan Stanley expects that the ECB “finally says that the risks to the economic outlook are no longer to the downside, but balanced”.

However, these experts admit that the ECB may not go so far, although they insist that we’ll see “at the very least (…) an acknowledgement that risks are closer to being balanced than they were at the time of the previous policy meeting.”

That shouldn’t come as much of a surprise to markets as Draghi already said as much in his testimony last week to the Committee on Economic and Monetary Affairs of the European Parliament that “the economic upswing is becoming increasingly solid” and “downside risks to the growth outlook are further diminishing.”

Draghi went further in that May 29 testimony to state that the ECB remained “firmly convinced that an extraordinary amount of monetary policy support, including through our forward guidance, is still necessary for the present level of underutilized resources to be re-absorbed and for inflation to return to and durably stabilize around levels close to 2% within a meaningful medium-term horizon."

ECB may take out mention of possibly lower rates

His commentary certainly suggested that no changes will be made to accommodation at Thursday’s meeting, though that does not rule out further changes to the wording of statement that could include the removal of the ECB pledging the possibility of rates at “lower levels”.

“If the reference to lower rates isn't dropped altogether, we expect Mr. Draghi to de-emphasize it in the Q&A,” Morgan Stanley said in its ECB preview.

Of note, the Reuters’ survey along with the analyst comments quoted from both Morgan Stanley and ING were made before Wednesday’s report that the ECB was expected cut its inflation forecast for 2017 to 2019 to 1.5%, well below the 2% target, while increasing its growth projections by about 0.1% for all three years.

While looking ahead to the announcement and press conference, the euro showing little movement. EUR/USD was up 0.05% at 1.1262 by 4:01AM ET (8:01GMT), EUR/GBP fell 0.13% to 0.8678, while EUR/JPY inched up 0.02% to 123.64.

Meanwhile, European stocks traded mostly higher. The Euro Stoxx 50 gained 0.20%, France's CAC 40 traded up 0.15%, while Germany's DAX advanced 0.26%. However, London’s FTSE 100 slipped 0.07% as general elections got underway in the U.K.

Draghi and ECB may become less dovish despite lack of policy change

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