BNP Paribas:
Eurozone: ECB almost there, but not quite The ECB’s policy decision and subsequent press conference will dominate Thursday’s schedule of events. In our preview of the meeting (please see ECB policy-meeting preview: A matter of time for more), we concluded that the ECB would most likely decide to maintain its current policy stance. In large part, this reflected the ECB’s need for more time and data to judge whether economic and financial developments would have a lasting, or merely transitory, effect on its medium-term assessment of inflation prospects.
This featured prominently in the press conference of 3 September and in the account of last month’s policy meeting. Still, we cannot rule out the possibility of a surprise easing at this meeting (a 40% chance in our view) given the bank’s acknowledgement of the downside risks to inflation following September’s meeting. That was a very unusual position for the ECB to take on the current president’s watch and, on the rare occasions it has happened before, a policy easing has followed soon after.
In the period since our preview, there has been one data release of note, the ECB’s bank lending survey for Q3. At the margin, it reinforced the case for no change in policy at this juncture. The key themes of recent quarters’ surveys ‒ easing credit conditions and improving loan demand ‒ were again evident in the latest poll (the cut-off point for which was 30 September). Still, there were a few glitches in there, too. One was the tightening of lending standards for mortgage loans. This, however, was exaggerated by a marked tightening of conditions in the Netherlands. The ad hoc questions in the survey on the impact of the ECB’s asset-purchase programme (APP) on bank behaviour were probably more significant.
The survey responses showed banks’ appetite for lending to the economy being enhanced by the programme. This can be interpreted in two ways: (1) that the ECB will conclude additional policy easing is not required, or (2) that it will provide succour to those on the Governing Council who see benefits to delivering additional asset purchases through a number of transmission channels, including the impact on lending. We are more in the latter camp and see this element of the bank lending survey as a reinforcement of our view that modifications to the APP are the most probable form of policy easing near term. That said, we do not expect the ECB to rule out the possibility of a lower deposit rate at this point.
ECB chief Mario Draghi is likely to be asked at the press conference whether the effective lower bound for rates has been reached and, to avoid a tightening of financial and monetary conditions, we would expect him to leave open all policy options available within the ECB’s mandate. Asset purchases helping to boost lending Need for more data favours ECB status quo But downside inflation risks imply an easing bias Bank lending survey not a game-changer
We continue to believe the subsequent meeting on 3 December is the most likely window for an announcement of further policy easing, with the review of the staff projections between now and then playing a pivotal role in securing the support of a majority of Governing Council members. If the ECB does not announce a change in policy this week, the market reaction will be heavily dependent on the communication at the press conference. We see various ways in which the ECB could signal that it is a step closer to an easing without actual saying so, including acknowledging, for example, that policy options were discussed at the meeting and referring to the importance of the review of the staff projections in the run-up to December’s meeting.
The meeting is taking place in Malta which typically means that some of press conference will be taken up by questions about local developments. The location should not affect the probabilities of various outcomes, however. Note, too, that ECB voting practices mean Bundesbank President Weidmann loses his vote temporarily at this meeting. One could interpret this as an argument for taking policy action now, as a way of limiting the level of potential dissent on the Council. He will, however, participate in the discussions as normal. Moreover, he is not the only Council member who is probably reluctant to add more easing when the APP is barely a third of the way through.
