Analyse fra Natixis:
ECB Q2: Do not get carried away!
The ECB has developed a habit of surprising the market, no matter how much has been demanded, and the dovish comments from ECB members suggest that the bank has again switched into an aggressive easing mode. The market is therefore expecting bold action next week. Judging from likely small revisions to the new ECB staff forecasts, however, we see a chance that Mario Draghi disappoints this time.
Clearly the ECB cannot surprise markets forever. Moreover, even if projections are likely to be downbeat, they are still consistent with a gradual recovery of the Eurozone economy and a slow pickup in inflation. The flip side of the coin, however, is that if the ECB disappoints, market participants will be significantly underwhelmed. It will be up to the ECB to decide whether (or not) it can run the risk of disappointing markets, having raised expectations to high levels.
Action is coming, but what form will it take? All eyes will be on the ECB next week, when the bank is scheduled to make its monthly policy announcement on December 3. On balance, we think that new ECB stimulus seems to be pretty much a done deal. For those who still had doubts, ECB’s president Mario Draghi gave a very dovish speech in Frankfurt last Friday. His speech was called “Monetary policy: past, present and future” and the key takeaway message was close to a promise that the ECB will take action next week:
“…if we decide that the current trajectory of our policy is not sufficient to achieve that objective, we will do what we must to raise inflation as quickly as possible. That is what our price stability mandate requires of us.”
1 Mario Draghi’s dovish speech was flanked by the comments made by Executive Board member Peter Praet. In a speech on Thursday he said that “…a central bank cannot allow itself too much discretion over the time horizon when inflation should return to its target…our independence rests on the fact that we are accountable, and that means delivering price stability over a horizon that is verifiable by the public.”
2 In light of these comments and with headline inflation hovering around zero since mid-2014, it is hard to imagine that the ECB will do nothing at the December meeting (chart 1). The question seems to be merely which form the easing will take.
1 “Monetary policy: past, present and future”, speech by Mario Draghi, 20 November 2015.
2 “Monetary policy under uncertainty”, speech by Peter Praet, 19 November 2015. Given that the likelihood of further stimulus from the ECB at the December meeting appears to be close to 100%, one could argue that the ECB’s new staff projections for growth and inflation may take a backseat. We believe, however, that it is worthwhile to take a look at the staffers’ projections because these projections serve as the basis for discussion within the Governing Council and therefore can be an important guide in order to guess the likely degree of the monetary policy easing. Based on the price action in the overnight index swap market and the currency market, financial market participants seem to assume the ECB staff projections will be revised substantially downwards again, thereby justifying bold action