ECB to drop QE easing bias, but leave all other parts in place - Rabobank

Analysts from Rabobank expect that during next week meeting, the European Central Bank to drop the easing bias on QE guidance, but leave all other parts of its communication in place for now.

Key Quotes: 

“Against the strong economic backdrop, it is difficult to maintain the easing bias on QE; conversely, the economy should allow for removal without much backlash from markets.”

“The accounts of the January meeting revealed that some Council members already favoured dropping the easing bias at the start of the year, but the majority wasn’t confident enough yet.”

“We believe that removing the easing bias allows the Governing Council to reiterate their confidence and gradually prepare the market for more substantial changes to the forward guidance later in the year, without sparking an overly hawkish market reaction.”

“For 2018 we expect the economy to expand at 2.2%, down from 2.5% for 2017, followed by 1.8% in 2019. This puts our forecasts for this year and next slightly below the ECB’s current staff projections of 2.3% and 1.9%, respectively. Conversely, the ECB’s inflation forecasts are currently lagging our own: in December, the ECB estimated inflation at 1.4% and 1.5% for the coming two years, while we expect inflation to come in at 1.5% in 2018 and 1.7% in 2019.”

“With an economy that continues to gear ahead, we believe that the ‘threat’ of increasing the asset purchases if the outlook becomes less favourable is getting increasingly difficult to maintain. Indeed, we would argue that the credibility of such a threat is already low at best: markets are certainly not expecting the central bank to significantly ramp up its asset purchases. Instead this part of the statement is generally seen as a remnant of earlier policy actions, dating back to the period when the recovery was still nascent, and downside risks to inflation were larger.”