The European Central Bank is meeting next week in Frankfurt, Germany to talk over and update the world on its monetary policy.
The ECB is scheduled to announce its latest monetary policy decision at 7:45 am ET on Thursday June 5. That will be followed by a press conference with ECB president Mario Draghi slated for 8:30 am ET.
Because growth has been sluggish and inflation has been low, market watchers will be looking for two major things from the ECB: a cut in interest rates and the signaling of an asset purchase program.
Economists at Goldman will also be looking closely at not just what Draghi says, but how he says it. Goldman recently wrote that, “it will be the tone of Mr. Draghi’s communication that matter for market developments, more than the mechanics of a negative deposit facility rate.”
Hints From The May Meeting
At its May meeting, the ECB kept its benchmark interest rate unchanged at 0.25% and its deposit facility rate unchanged at 0.0%.
In his press conference following the meeting, Draghi suggested the central bank would be comfortable taking action at its June meeting if needed.
Since the ECB’s May meeting, the Euro has weakened against other major currencies.
European sovereign debt has been in rally mode since the beginning of the year, and remains so ahead of next week’s meeting.
Interest Rates Are Getting Cut
Economist Anthony O’Brien and his team at Morgan Stanley expect the ECB to cut both its benchmark interest rate and deposit facility rate 15 basis points.
Economists at Goldman expect the same.
At Nomura, Lewis Alexander and his team expect the ECB to cut these rates by 10 basis points.
Marc Chandler, head of global currency strategy at Brown Brothers Harriman, noted that the ECB also maintains a third marginal lending rate, currently set at 0.75%. Chandler believes there is a “moderate” likelihood the ECB cuts this rate.
Michael Martinez at Societe General sees the ECB cutting the marginal lending rate 25 basis points to 0.5%, while cutting both the benchmark and deposit facility rates 10 basis points.
Asset Purchases Are A Maybe
There has also been speculation surrounding the potential for the ECB to signal an asset purchase program to begin at some point this year.
Most economists see this as a somewhat unlikely development at this point. However, measuring the possibility, and probability, of an asset purchase program is on the mind of economists, and is reminiscent of speculation last year surrounding when the Federal Reserve would begin tapering its monthly asset purchases.
Analysts at Capital Economics think the ECB will eventually be forced to do more.
At Nomura, Alexander put a 25% probability on the ECB announcing an asset purchase program by year-end.
The Global Currency Research Team at Morgan Stanley wrote in a May 29 note that, “should inflation remain at low levels, we do not rule out Draghi using much more aggressive measure in the months ahead. Full-scale quantitative easing or even [foreign exchange] intervention are possibilities.”
Chandler recently wrote that, “the signals from policy makers seem to suggest an inclination for several measures that stop short of quantitative easing.”
At Societe Generale, Michael Martinez believes the ECB will signal an asset purchase program totaling EUR 25 billion per month beginning in the second half of the year.
As far as what Draghi says next week, Martinez says that the market risk is for the central bank to disappoint (emphasis ours):
“We expect the ECB staff to marginally cut its growth and inflation outlook, but the ECB would give clear indications that the asset purchase programme could be expanded substantially by buying government bonds later, if the inflation outlook deteriorates. Market expectations are high, as experienced by the fall of the euro since the May press conference and the risk is that the ECB disappoints. Medium-term, ECB action will be welcome, but we have doubts on the effectiveness of any ECB action, even if the ECB contemplates a large QE programme. Indeed, structural reforms would be much more powerful to improve the fate of the European economy.”
Draghi’s Latest Comments
Draghi’s speech dealt with the problems facing monetary policy in a low inflation environment.
Draghi reiterated that the ECB’s goal is for 2% inflation, saying, “there is no debate about [the ECB’s] goal, which is to return inflation towards 2% in the medium term.” Over the last year, Eurozone inflation has consistently run south of 1%.
Draghi also addressed the various tools the ECB may use in response to credit conditions throughout the Eurozone, acknowledging that it could use asset purchases to reduce any a drag in the recovery due to credit supply constraints.
The question is: will they?
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