NOMURA: Europe is looking better, but that won’t be enough for the ECB to signal a shift in its policy stance

Photo: Getty/Ralph Orlowski

The global economy is looking better than it has for several years right now, and Europe is no exception.

Indicators on economic growth and inflation are starting to push higher, indicating that the need for ultra-easy monetary policy settings may no longer be required.

Ahead of Thursday’s European Central Bank (ECB) meeting, it has a more than a few pondering whether Mario Draghi and the ECB governing council will use this opportunity to prime markets for the start of a normalisation in policy.

As this heat-map from Nomura’s global markets research team shows, economic conditions in Europe and globally have improved in recent months.

Source: Nomura

Things, albeit with noticeable stumbles along the way, appear to be heading in the right direction.

However, it won’t be enough to see the ECB shift its mindset on policy on this occasion, says Nomura.

“In line with an overwhelming consensus, we expect no change to the ECB’s monetary policy stance at this week’s meeting,” it says.

“We expect all key policy rates to be left unchanged and no change to the monthly pace of asset purchases. These will be reduced to EUR60 billion in April and, on current plans, will run at least until December 2017.”

It also expects the ECB will announce that its second targeted longer-term refinancing operation, or TLTRO II, will not be extended.

TLTROs are longer-term loans at attractive rates offered by the ECB to banks to encourage lending to the real economy.

Nomura says that instead of policy settings, the focus will yet again be on updated economic projections from the bank, along with Mario Draghi’s post-meeting press conference.

“We expect the forecast for GDP growth for 2017 to be revised up to 1.8% to reflect stronger-than-expected growth momentum in recent months,” it says. “For CPI inflation, we also expect a moderate upgrade of the forecast for 2017 to 1.4%, reflecting the recent batch of higher-than-expected inflation outcomes.”

This table from Nomura shows how it thinks the ECB’s forecasts will change from those offered in December.

Source: Nomura

Despite the upward revisions — seemingly a more hawkish signal from the bank — Nomura says that won’t be enough to see a shift in rhetoric from the ECB president.

“We expect Mario Draghi to acknowledge that the downside risks to the economic outlook have ebbed in recent weeks, but partly thanks to the upcoming elections, he will probably stress that the overall balance of risks is still tilted to the downside,” it says.

“We also expect him to argue that core inflation is still too low for the ECB’s comfort.

“ECB President Draghi has been quite clear that the ECB wants to see more evidence that its inflation goal will be achieved before it normalises monetary policy.”

Nomura says that evidence will continue to build in the coming months, paving the way for a normalisation in policy settings.

“We still expect to see that evidence emerge over the next few months via a firming and maturing growth cycle and via higher core inflation.

“That should pave the way for an announcement of a tapering of the QE program at the September meeting for enactment at the start of next year.”