ECB Preview: 6 Major Banks expectations from July meet

As we head towards the ECB’s July meeting, following are the expectations as forecasted by the economists and researchers of 6 major banks.

Surprisingly all the banks are expecting that the ECB is unlikely to change any of its key policy settings. Meanwhile, because of the negative impact of the referendum and the recent drop in market inflation expectations, a dovish rhetoric is widely expected. In addition, Mr. Draghi is likely to underscore that the ECB stands ready to add more stimulus if its forthcoming analysis indicates that this is warranted.

MUFG

The ECB is expected to strike a more dovish tone tomorrow likely signalling that further monetary easing is under consideration in response to the negative shock from the Brexit vote. We expect the ECB to deliver further monetary easing in September when the staff’s economic forecasts are updated. It will be interesting to hear the comments from President Draghi which may shed further light on whether the ECB is willing to lower rates further into negative territory, and potentially expand the universe of assets that are available to purchase under the QE programme. The health of European banks especially in Italy is also likely to be in focus. One big issue that will certainly be addressed in the Q&A today will be the shortage of securities available for purchase given certain constraints set out at the start of QE. That shortage will have to be tackled at some point especially if the ECB today hints that QE is likely to continue beyond the current deadline of March 2017. Expectations of action are low and if the ECB was to signal an extension of the March 2017 deadline, the reaction is likely to be muted given the ECB has always stated the program could be extended. The ECB is also likely to argue that more time is required to assess the actions already taken.

Danske Bank

Given the Bank of England (BoE) refrained from any immediate ‘Brexit easing’ last week, it would be a surprise if the ECB adds further stimuli today. However, given the potential negative impact of the referendum and the recent drop in market inflation expectations, a dovish rhetoric is widely expected, underlining that the ECB is ready to step up easing in case the economic outlook weakens over the coming months. We expect the ECB to ease monetary policy at the September meeting, when new ECB staff forecasts become available. Our call is that the QE programme will be boosted temporarily to EUR100bn for the rest of the 2016 and that the programme will be extended until September 2017. We do not forecast any further rates cuts from the ECB. The EGB market will closely scrutinise any comments on the ECB bond purchase programme, especially as an increasing number of German bonds have become ineligible for ECB purchases after the Brexit vote. However, again we doubt we will see any changes today. Any technical changes are likely to be announced together with new stimuli at the September ECB meeting.

RBS

We expect no easing action from the ECB in July. While we continue to expect further ECB easing this year as core inflation fails to pick up and Brexit uncertainty takes a toll on growth (RBS economics has downgraded its Eurozone growth forecasts to 1.4% in 2016 and 1% in 2017), we do not expect cuts or accelerations in PSPP today. ECB observers will be looking for hints on potential alterations to PSPP design. Referendum risk materialising, but ECB to wait for effects of TLTRO2. Draghi is likely to highlight the downside risks resulting from the result of the British referendum, while at the same time noting that immediate spillovers via the financial markets were limited, leading to the conclusion that for the time being the “Additional stimulus […] expected from the monetary policy measures still to be implemented” should be sufficient. TLTRO 2 still needs to kick in. We do not expect comprehensive changes this week but we do expect Draghi to tell us the ECB is studying these issues in committee and that September is the most likely date for a more substantive change. We think those changes will accompany a further loosening of policy at that meeting on 8th September. We specifically expect a 10bps cut in the deposit rate (from -0.4% to -0.5%) and a €20-25 billion up-lift in the APP to be enacted at that time.

Rabobank

We don’t expect the ECB to announce fresh measures today, but in absence of this we do expect Mr. Draghi to underscore that the ECB stands ready to add more stimulus if its forthcoming analysis indicates that this is warranted. We therefore call for a 10 bps cut in the deposit rate, from -0.40% to - 0.50%, at the meeting in September, if only because it would re-affirm its dovish stance and is the easier one among the Council’s options. We also hope that Mr. Draghi will give some detail with regard to the ECB’s assessment of the first TLTRO-II, which, with a net uptake of EUR 34bn, perhaps wasn’t the huge success that he and his fellow GC members had hoped for. Finally, with regard to the purchase programme, Mr. Draghi may also face questions on what tweaks the ECB still has available should it run into difficulties in sourcing sufficient paper to meet its monthly target.

TDS

We're looking for no action, and no hint of imminent action, which should leave the EUR higher on the day. There was speculation that the ECB would consider changing the composition of its QE purchases, presumably moving from a capital key weighting to weighting purchases by debt outstanding instead. There has also been speculation that the ECB may be worried about the impact of Brexit and hint that there's further easing to come in September.  We only see a marginal hit to EZ growth (couple of tenths of a ppt) and if the BoE can wait to ease then surely the ECB has no reason to rush.  We look for Draghi to play down the Brexit impact and focus on the stimulus in the pipeline as full implementation of the March policy announcement is only just underway.

SocGen

The ECB meets today and is under pressure to act son to widen its bond-buying plans, by widening issue limits and push back the March 2017 end-date for the asset-purchase programme. Our best guess is that the second of these will wait until after the summer but we may get something on the former, along with the usual dovish comments from Mr Draghi. That doesn’t sound exciting enough to drive bond yields lower and push EUR/USD back down through 1.10, sadly.

Click here to read more about the ECB Interest Rate Decision from our in house Chief Analyst Valeria Bednarik titled “ECB Preview: new scenario, old words”

For all those of you interested in further insight of the coverage, kindly click on the title below:

“What is the currency war? Next chapter: The ECB meeting”