All eyes are on the ECB this week
Markets begin their shift in focus towards central banks once again
The ECB will be the first big name in that regard as they are due to announce their latest monetary policy decision on Thursday, 12 September.
The question now isn't a matter of if they will introduce additional stimulus but what will the stimulus package consist of instead?
In my view, the ECB will have limited opportunities moving forward to spring a surprise on markets in order to bolster confidence and inflation expectations so this is essentially a "go big or go home" moment for them.
So, what can we expect from the Draghi before he moves to the sidelines?
A cut to the deposit facility rate is all but a given but we will see how much deeper into negative rates territory they'll be willing to explore. As seen above, markets are anticipating a ~45% chance of the ECB cutting rates by 20 bps instead of 10 bps.
With a rate cut, the ECB will also introduce a tiering system to help alleviate pressure off banks due to the negative rates - something similar to what we see in Japan.
Besides that, the central bank is also expected to revise its forward guidance to reflect a more dovish stance by extending the horizon to keep rates at present or lower levels.
But the key question will be whether or not we'll see the reintroduction of QE.
This is where the "go big or go home" scenario becomes more important. Essentially, if the ECB is to restart its QE programme, they will have to do so with a bang.
Announcing purchases of something around the realms of €20-30 billion per month may just defeat market confidence surrounding the announcement itself, unless they are looking to tweak the issuer/purchase limits moving forward.
If anything, they need to step up the purchases to something around €40-60 billion per month to really set the tone on inflation expectations in my view.
But with regards to QE, we've seen that governing council members are divided on the matter and that may make it tough to fight back against the market.
If the QE announcement underwhelms, the market will eventually push back against them. If there is no QE announcement at all, the market will also push back against them.
It basically underscores that the ECB is in a really rough spot at the moment to try and shore up economic confidence and inflation expectations. Do you think they will they be able to find the right approach on Thursday?