Investing.com - The European Central Bank's (ECB) latest interest rate decision is due at 12:45GMT (7:45AM ET) on Thursday, with most not expecting any change in policy despite surging inflation and robust growth.
This means that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.40%, respectively.
The ECB is also respected to repeat that the asset purchase program will be reduced in quantity by €20 billion at the end of March to, in the central bank’s own words from the last decision, “continue at a monthly pace of €60 billion ($63.4 billion) until the end of December 2017, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim.
ECB expected to adjust forecasts for higher growth, stronger inflation
In that light, and barring any surprises, markets will most likely focus on the March update of the ECB’s economic forecasts.
Nomura economists expect the projection for GDP growth for 2017 to be revised up to 1.8%, from the prior 1.7%, to reflect stronger-than-expected growth momentum in recent months.
Morgan Stanley expects that outlook to be “roughly unchanged” with a possible slight revision to the upside.
As far as consumer price index (CPI) inflation, Nomura weighed in with expectations for a moderate upgrade of the forecast for 2017 to 1.4%, from the prior 1.3%.
Barclays went further suggesting the CPI forecast should be “revised up by at least 0.5pp (from 1.3% to 1.8%)”.
“However, what will matter for the discussion regarding the monetary policy stance are the projections for 2018 and 2019, which were at 1.5% and 1.7% in the December scenario,” these analysts said, adding that they “are likely to be broadly unchanged.”
Draghi set for repeat performance due to ‘downside risks’
Of course, close attention will be paid to ECB president Mario Draghi's press conference 45 minutes after the policy announcement. He will probably avoid any discussion about winding down asset buys, instead sticking to his stance that the recent surge in inflation is temporary, growth is fragile and political risks clouds the outlook, requiring stimulus.
“At the post-meeting press conference we expect ECB president Draghi to acknowledge that the downside risks to the economic outlook have ebbed in recent weeks,” Nomura said.
“But partly because of well-known political risks, he will likely stress that the overall balance of risks is tilted to the downside,” they added.
Barclays too noted that the ECB was in a difficult position to send a hawkish signal to markets at a time when risks related to upcoming elections in France are on the rise.
“A potential victory by Marine le Pen, albeit polls (Ipsos and Kantar) indicate this as unlikely, that could present adverse consequences on the integrity of the currency union has already appeared to impact EGB spreads,” these analysts said.
“As a result, we believe the ECB could opt to wait until after the French elections before softening the forward guidance,” they added.
Morgan Stanley expects Draghi “to emphasize that the Governing Council still sees risks as skewed to the downside, along with an unchanged formulation of the forward guidance that QE will last for as long as necessary and that the key policy rates will stay as they are, or be cut (our projections foresee them unchanged), past the time horizon of the asset purchases.”
Future path for removal of accommodative policy
These strategists commented that “the next step, should the ECB want to convey a more balanced message and prepare the markets for a further scaling back of the QE program, is to change the risk assessment from skewed to the downside to broadly balanced.”
They suggested that the move could come at the June meeting.
“Once this happens, the next step is to announce that QE will continue in 2018 too, but the monthly purchases will be reduced further,” these experts said, postulating that “a good month to do this is September.”
Along those lines, Morgan Stanley appeared to agree with a recent Reuters poll of experts that found that the ECB will stay in the background through upcoming elections in key European countries and is only likely to signal a shift away from its ultra-easy monetary policy toward the end of this year or early next.
Independently of the timing, Dankse Bank noted that, when the ECB is ready to initiate a less accommodative monetary policy stance, it would likely remove its forward guidance.
“Currently, the ECB communicates that policy rates are expected ‘to remain at present or lower levels for an extended period of time, and well past the horizon of our net asset purchases’ and at some point in time the ECB will start stating that policy rates should not go lower, but stay at present levels for an extended period of time,” these economists explained.
“Likewise, the ECB could at some point in time remove its easing bias related to the QE purchases where it currently communicates that it stands ready to increase its QE in terms of size and/or duration,” they added.