• Goldman Sachs European Economists think that the ECB will not make any change to current policy
  • They think the ECB will continue to adopt dovish language bias
  • They think the ECB will reiterate that additional conventional and unconventional measures are a possibility in the coming months if the economic outlook worsens and inflation fails to pick up or financial conditions tighten.

Potential surprises:

  • The ECB could surprise by announcing a small rates cut or a liquidity injection: “In the event of this type of easing, no doubt the front-end of the curve would rally, but, given what the market is pricing, the move would not be sizable, about 5 bp lower than current market rates. We do not expect a sizable move at the long-end of the curve either, provided that non-linear effects of additional easing expectations do not kick in. We note that historically, on average, any cut in the policy rate impacts the long end less than proportionally”
  • The ECB could surprise investors to a greater extent by moving in the direction of more unconventional policy measures directly targeting credit formation. Goldman goes on: “For example, the ECB could surprise by launching a long-term LTRO that has some conditionality attached of the type of the UK funding for lending scheme or could take a more active role in the ABS securitization market along the lines we discussed in our previous research…We think that the political threshold for this to occur is still too high, particularly given that the benefit of further sovereign yields’ decline is limited at current levels”

Note, both of these potential surprises from GS would be a negative input to EUR FX rates. There have been large sellers camped around 1.3960, a surprise like the one outlined by GS should see us thoroughly test their resolve!

Longer-range projections from Goldman Sachs:

  • “Looking beyond the next meeting, our group sees a non-negligible chance (40%) that additional easing might be a possibility. In this context, the most likely measure is a small downward shift (e.g., -15 bp) in the official rate corridor, bringing the deposit rate to negative. A pausing of the sterilization of government bond purchases conducted under the SMP, another long-term refinancing operation, or credit easing policies that target, for example, the securitization market, are possible. We believe that the probability that the ECB will start buying government bonds is very low and requires evidence of a more acute deflationary risk”