While expectations for much change at the European Central Bank meeting this week are very low indeed, the recent turn down for incoming economic data is seeing some nerves amongst analysts.
Preview via Barclays, Citi and Morgan Stanley follow ...
Barclays:
We do not expect a change in the ECB's monetary policy stance following its meeting next Thursday.
- However, we think that it will need to recognise that the activity data releases have weakened, the geopolitical risks remain elevated, and the March inflation data did not deliver positive surprises. For these reasons, we think the statement will probably sound slightly more cautious and the balance of risk a bit less upbeat than in March.
All of these factors, in our view, will continue to support the view of a majority of governing council members of a very gradual approach to removing the unconventional monetary policy measures.
- We continue to expect a short tapering of net asset purchases that will end the programme in December. The ECB would pause for roughly six months and in June 2019 would deliver a DFR hike of +15bp. Then, in Q4 19, we forecast a DFR and MRO hike of +25bp each, effectively removing negative rates by end of 2019
Citi:
- Very little is expected with the June meeting more likely to be interesting. The forward guidance is thus going to be left unchanged. Citi Economics think the ECB is likely to open the door in coming weeks to a post September short taper, and stress the possibility of doing more.
Morgan Stanley:
With the QE easing bias removed in March, the meeting on April 26 is unlikely to bring further changes.
- We expect them to come at the following one in June, when the ECB is likely to signal the end of QE in 4Q.
- From that point, i.e., after the net asset purchases have come to an end, the sizeable stock of assets that the central bank has accumulated, which will probably be reinvested for a long time, should continue to underpin the inflation trajectory, along with very low interest rates.
One stream of analysis that the central bank is pursuing has to do with potential growth: if it's now beginning to rise again, then monetary policy can be recalibrated slowly while maintaining a stance that's expansionary enough for inflation to converge to target.
That any shift is likely to be incremental isn't new. What's new is that there's the risk that it turns out to be even more incremental than currently envisaged.
- This is because economic growth is decelerating somewhat, although still in the context of a fairly robust expansion and perhaps a previously overly bullish sentiment.
- A variety of external risks, e.g., the potential impact of US import tariffs, if they were triggered for the EU too, equally argues for a degree of gradualism and, probably, a slightly dovish tilt at the policy meeting later this week.
Assessing inflation convergence, confidence and resilience:
- It's also true, however, that there's just a limited scope to extend the net asset purchases much further - unless the parameters of the QE programme are redesigned significantly, which we doubt. And there's no need either. With spare capacity diminishing and wage growth beginning to accelerate, the central bank does project overall inflation almost fully converging to target over the medium term. Various measures of underlying inflation, while still low, are on the rise, thus making the ECB more confident about the direction of travel. But the HICP path has to become more resilient to stay the course even without QE.