ECB: Expect no fireworks – BMO CM

In view of Jennifer Lee, Senior Economist at BMO Capital Markets, there will be no changes to monetary policy (refi rate at 0.0%, deposit facility at -0.4%, marginal lending facility at 0.25%) from today’s ECB meeting.

Key Quotes

“The usual line, “the Governing Council expected the key ECB interest rates to remain at their present levels for an extended period of time, and well past the horizon of the net asset purchases” will likely be in the press statement. And given that the ECB (and practically all central banks) has yet to see a “sustained adjustment in the path of inflation consistent with its inflation aim”, expect confirmation that net asset purchases will continue to run until the end of December 2017.” 

“However, what President Draghi says during the press conference, which begins at 8:30 am ET, will be more interesting. This will be a great opportunity to pick up on the more upbeat tones that have gradually taken hold over the past year. Let’s review. In December 2016, QE was extended by nine months, but the monthly buying was reduced starting in April. In January 2017, the underlying message was that it was “too soon… too early” to discuss tapering. In March, the message was mixed (optimistic on growth, not so much on inflation), and there was no longer an urgency to take more action. That’s when the market seized on the optimism and started thinking taper. And that’s when a communications refresher was likely sent around the central bank, and officials played down the tapering idea in public. In April, the recovery was described as being “increasingly solid”; and, in June, not only was the guidance on rates removed, but deflation risks had “largely vanished”.”

“So the July meeting will be an ideal stepping stone to prepare markets for change. But there is one more event before the September 7th meeting. Mr. Draghi is reportedly giving a speech at the Kansas City Fed’s Jackson Hole confab next month. This will be his first such talk at this event since 2014, when he gave telling quotes such as “We stand ready to adjust our policy stance further” and that they could use “unconventional instruments to safeguard firm anchoring of inflation expectations” (although the 2nd quote was a repeat from the ECB meeting earlier that month). Then, at the next meeting in September 2014… BOOM!... they cut rates again, and announced plans to buy more securities.”

“Why did I just take this stroll down memory lane? We expect the ECB to adjust their QE program before the end of this year, quite likely as soon as the September 7th meeting, given that there will be fresh staff forecasts released at that time. A trim to the monthly purchases, from €60 bln to, say, €40 bln, is a possibility. And with two great opportunities to prepare the markets for that move—July meeting and August gathering of central bankers—markets will have plenty of time to adjust.”