ECB to hold off today - MUFG

Derek Halpenny, European Head of GMR at MUFG, suggests that they don’t expect the ECB to make any formal announcement on the extension of QE from the current deadline of March 2017 today.

Key Quotes

“This is in part due to our belief that the ECB don’t really have to announce something today. Don’t forget, the ECB in every monetary policy statement commit to QE through to March 2017 or “beyond, if necessary, and in any case until it sees a sustained adjustment in the path of inflation consistent with its inflation aim”. So the message is clear and consistent and therefore financial market participants fully expect the extension of the deadline. Confirming and laying out details 6 months ahead of the deadline appears unnecessary to us at this stage.

Waiting until closer to the March 2017 deadline (December probably) will allow the ECB to make a better informed decision – the impact on inflation from the energy base effect unwind will be clearer to see by then; the US presidential election result will be known; and the ECB will have had time to assess the outcome of important policy decisions from the Fed this month and the BoJ over the coming months in conjunction with its “Comprehensive Assessment”.

Finally, the ECB staff forecasts are likely to be broadly unchanged. The 2016 inflation forecast of 0.2% might prove too high with the year-to-date average at 0.04% and inflation in the last four months of the year is going to have to average 0.4% for the 0.2% forecast to be realised. The Brexit impact is still unclear but at the margin the real GDP forecast in 2017 (1.7%) may undergo a modest downgrade.

The changes to forecasts are perhaps both small enough not to argue for urgency today but also in the direction that argues the need for policy to be extended in the future. Forward guidance therefore as usual will be important and we would expect a decision not to announce anything today to coincide with a clear message from Draghi that the ECB is working on redesigning the QE program in order to ensure the ECB can persist with the current monetary stance for as long as is required in order to meet its legal price stability mandate. We doubt very much the inaction today will alter monetary policy expectations much but given the recent positive momentum favouring the euro, the risk is to the upside given some market participants are expecting some form of easing today.”