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ECB expected to stand pat though Draghi could begin ‘playing with words'

Published 04/27/2017, 03:30 AM
Updated 04/27/2017, 03:30 AM
© Reuters.  ECB forecast to leave rates and risk assessment unchanged

Investing.com - The European Central Bank's (ECB) latest interest rate decision is due at 11:45GMT (7:45AM ET) on Thursday, with most not expecting any change in policy despite recent indications of robust growth and surging inflation.

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

“We don’t expect changes in the policy stance or forward guidance, so still ‘growth risks tilted to the downside’ and policy rates expected ‘to remain at present or lower levels for an extended period of time, and well past the horizon of the net asset purchases,’” strategists at Nordea Markets said.

ING economists also agreed, explaining that “economic data argues for a wait-and-see stance.”

“Disinflationary risks have disappeared, but no inflationary risks are in sight,” they explained.

However, Morgan Stanley suggested that minute changes to the outlook could be warranted given recent improvements in some macroeconomic data and the reduction of politic risk after Emmanuel Macron won the first round in France’s presidential elections.

“So, the central bank should at least acknowledge that things are getting better and that the skew of outcomes around the base case is becoming more symmetric,” these experts said in their note to clients titled “ECB Preview: Playing with Words”.

“Even though the ECB won't act just yet, it's likely to continue to select a carefully chosen formulation to describe an improved economic outlook with diminishing risks, thus paving the way for a gradual reduction of the monetary stimulus,” they commented.

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More clearly, they emphasized that “we don't think that the ECB will drop its reference to downside risks to growth at this week's policy meeting, though it's likely to come to the conclusion that these risks, which it had already described as having diminished, have retraced even further.”

June expected to be the month for changes

Indeed, like Morgan Stanley, analysts widely believe that no major changes will arrive until at least June.

A recent Reuters poll found that the ECB will stay in the background through upcoming elections in key European countries, including the final runoff for the French presidency on May 7 and the German Federal election on September 24, and is only likely to signal a shift away from its ultra-easy monetary policy toward early next year.

“We see a step-by-step process whereby the risk assessment and the forward guidance change in June, QE tapering is announced in September and starts in January, and the depo rate is then hiked in 2H18,” Morgan Stanley said.

Nordea also believes that the change in the risk assessment will arrive in June and involve adjusting the wording in June to “balanced” from “tilted to the downside” and removing the possibility of interest rates going lower by removing “lower levels” and leaving only “at present levels for an extended period of time”.

These experts expect asset purchases to be reduced to a lower monthly pace of about €30-€40 billion ($32.6-$43.5 billion) and come to an end by mid-2018, while they don’t forecast the ECB to move ahead with the first deposit rate hike until the first half of 2019.

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As markets looked ahead to the announcement and press conference, EUR/USD was up 0.08% at 1.0913 by 3:27AM ET (7:GMT) and EUR/GBP saw losses of 0.37% at 0.8458.

Meanwhile, European stocks traded lower in early morning trade. The Euro Stoxx 50 lost 0.53%, Germany's DAX fell 0.30%, France’s CAC 40 shed 0.36%, while London’s FTSE 100 traded down 0.71%.

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