The firm outlines its expectations ahead of the ECB meeting this week
Analysts at the firm say that "the question is not if the ECB will announce new initiatives but how much it will deliver" instead. I think that's an argument that everyone already has figured out by now. So, let's see what they are expecting:
"We expect the ECB to announce (1) a 20bp cut in the deposit rate (other key rates unchanged) and that the extended forward guidance ('at present or lower...well past the horizon of net asset purchases') will remain; (2) a 12-month QE restart of €45-60bn per month, albeit also acknowledging the downside risks given the recent hawkish communications from a few Governing Council members; and (3) a tiering system."
At this stage, a cut to the ECB deposit facility rate, a tiering system and a change in forward guidance message is all but guaranteed. The big question is whether or not we will see the reintroduction of QE this week.
Essentially, it is a "go big or go home" kind of thing for the ECB. There's no point in restarting QE again if they are going to stick with small purchases (€20-30 billion per month) but then again they may not have much of a choice given issuer/purchase limits.
As such, there's a high chance that policymakers may refrain from doing so until they can be sure of introducing something significant to markets rather than just put out "for show".
Now, the initial reaction may be for the euro to gain because the straightforward thinking here is that "no QE = less dovish" but in a convoluted way, the lack of additional measures that the ECB can be pursued also shows limitations to counteract the economic downfall.
As such, if economic and inflation data continue to deteriorate, expect markets to turn on the ECB rather quickly and that may very well seal the 'Japanification' of Europe.
