Most banks expect the European Central Bank to ease policy further, probably as early as December and in the form of an extension of its quantitative-easing program, according to analysts.
At this week’s press conference to be held in Malta, ECB President Mario Draghi is expected to use dovish rhetoric, which may push the euro lower at least temporarily, while leaving policy on hold. A cut in the central bank’s deposit rate is seen by economists as the most powerful tool to weaken the euro, even as they assign low odds for this to be announced before year-end as the measure may be used only if euro-zone financial conditions worsen.
Expectations for more policy accommodation increased after ECB Governing Council member Ewald Nowotny said on Oct. 15 that both the headline and core measures of euro-area inflation are “clearly” missing the central bank’s target. However, he said on Oct. 18 that policy makers may not extend quantitative easing, or QE, anytime soon.
A survey conducted by Bloomberg shows economists expect the ECB to step up QE by January 2016. Below are more details of such expectations, based on published research and interviews:
BARCLAYS (team including Nikolaos Sgouropoulos, Cagdas Aksu)
- WHEN: Barclays expects an announcement of QE extension in December, when the ECB updates the 2015 fourth-quarter staff economic forecasts.
- HOW: The ECB has two main options to provide more accommodation; first, making the QE more expansive; second, introducing the possibility of a deposit-rate cut more openly, or delivering it. The first option is more likely at this stage and the easiest way would be to lengthen the end-date from September 2016 by six to nine months to 1Q-2Q 2017; this is already expected by markets.
- IS A DEPOSIT RATE CUT LIKELY: Barclays doesn’t rule it out but says that it remains unlikely for the next two meetings; a likely trigger for a rate reduction would be a further material appreciation of the euro, possibly related to more signs that the Federal Reserve will keep policy on hold for longer.
- EXPECTATIONS FOR OCT. 22: Expects a continuation of dovish rhetoric.
- “We think that it is just a matter of time until the ECB decides to drive EUR/USD lower.”
CREDIT SUISSE (team including Christel Aranda-Hassel)
- WHEN: More ECB policy accommodation is in the pipeline, probably in December. The euro is a key trigger for more such action and if it trades above $1.15 and toward $1.20 in the run-up to Thursday’s meeting, we would bring baseline December QE extension forward to the October meeting.
- HOW: The baseline scenario is that the ECB will state that the QE program is extended to March 2017 or beyond.
- IS A DEPOSIT RATE CUT LIKELY: Cutting the deposit rate further and/or increasing the purchased amount would require a more significant deterioration in the inflation outlook.
- EXPECTATIONS FOR OCT. 22: Below and up to a euro level of $1.15 in the run-up to Thursday’s meeting, expect the ECB to keep policy unchanged and deliver a very dovish press briefing, which would leave the door wide open for action in December.
GOLDMAN SACHS (Dirk Schumacher)
- WHEN: The ECB may ease further at December or January meetings.
- HOW: By extending the purchase program until mid-2017, with a tapering from January 2017 onward.
- IS A DEPOSIT RATE CUT LIKELY: A sharp appreciation of the euro may prompt a further reduction in the deposit rate; this isn’t the base-case scenario at Goldman Sachs.
- EXPECTATIONS FOR OCT. 22: Expects the ECB to stay on hold and Draghi to adopt a strongly dovish undertone.
- “Coming policy meetings are pivotal if the ECB wants to re-establish its credibility. It is decision time for the ECB,” strategists including Robin Brooks wrote in a note to clients.
BOFAML (team including Gilles Moec, Athanasios Vamvakidis)
- WHEN: BofAML pushed its central case for QE2 from October to December.
- HOW: By December, the ECB would probably need to deliver not only an extension beyond September 2016 but also an expansion with the “delta” in the purchases possibly being directed toward corporate bonds.
- IS A DEPOSIT RATE CUT LIKELY: BofAML doesn’t expect it and says it would be a surprise for markets as very little is priced in and Draghi said that the deposit rate has reached its floor. An even lower rate may complicate QE implementation.
- EXPECTATIONS FOR OCT. 22: It remains a “live” meeting; the communication could be complicated for Draghi; if he comes out too hawkish, there is a risk that the euro exchange rate could go through a knee-jerk leap.
- “We think the more the ECB waits, the more it will have to do to convince the market it can deliver on its price stability objective.”
UNICREDIT (team including Marco Valli)
- WHEN: More easing may be announced in the first months of 2016, latest by March.
- HOW: UniCredit expects the ECB to boost QE by 300 billion euros to 400 billion euros after September 2016.
- IS A DEPOSIT RATE CUT LIKELY: QE2 is much more likely than a deposit-rate cut.
- EXPECTATIONS FOR OCT. 22: Expects no action and dovish rhetoric, mainly intended to stem euro gains.
- “It seems that EUR/USD at 1.15-1.20 may represent a sort of pain threshold. This implies that the dovish rhetoric is very likely to continue and, possibly, intensify this week.”
BNP PARIBAS (team including Ken Wattret)
- WHEN: December is the most likely timing of a move, in tandem with the review of the ECB’s staff macroeconomic projections.
- HOW: Expects an extension of the ECB’s asset-purchase program beyond September 2016; also expects the monthly volume of purchases to be increased by 10 billion euros.
- IS A DEPOSIT RATE CUT LIKELY: It would come into play if the changes to the asset-purchase program fail to have the desired effect on the euro-area conditions.
- EXPECTATIONS FOR OCT. 22: The press conference should leave the door ajar for a lower deposit rate, as the ECB aims to lean against tightening of financial and monetary conditions.
- “We would not rule out a surprise policy change as soon as this week. We put the chances at around 40 percent.”
HSBC (Fabio Balboni)
- WHEN: HSBC expects the QE program to be formally expanded in December.
- HOW: By dropping the reference to September 2016 and making it effectively open-ended.
- IS A DEPOSIT RATE CUT LIKELY: It’s unlikely as it would be in contradiction with the policy of the balance-sheet expansion.
- EXPECTATIONS FOR OCT. 22: HSBC expects the ECB to forcefully reiterate its commitment to expand the program if necessary without delivering any actual change.
- “We won’t have a formal expansion of the size of monthly purchases for now. Otherwise, as the constraints become apparent, the ECB might face considerable credibility problems if inflation doesn’t revert quickly.”
DEUTSCHE BANK (Mark Wall, Marco Stringa)
- WHEN: The ECB will probably act further in December; Deutsche Bank changed its outlook on Oct. 2 saying that further QE is no longer just a risk.
- HOW: Expects a six-month flexible extension of the QE program.
- IS A DEPOSIT RATE CUT LIKELY: A QE extension is more likely than a deposit-rate cut.
- EXPECTATIONS FOR OCT. 22: The council will likely sound increasingly dovish, but it is unlikely to take concrete action in the absence of negative shocks.
- “A depo cut would need to be designed to incentivize lending to SMEs to be effective. Otherwise it might not compensate for the cost of the policy U-turn.”
CREDIT AGRICOLE (Valentin Marinov)
- WHEN: The ECB may ease further in the first quarter of 2016.
- HOW: It may do it by extending the duration of asset purchases beyond September 2016, initially. The bank also expects policy makers to leave the door open for an increase in the amount of monthly debt buying.
- IS A DEPOSIT RATE CUT LIKELY: A deposit-rate cut isn’t part of Credit Agricole economists’ base case. However, G-10 currency research head Valentin Marinov says he wouldn’t rule out another decrease to boost the impact of any additional QE measures.
- EXPECTATIONS FOR OCT. 22: The ECB will likely stay on hold. It may downgrade the region’s economic outlook and signal that the QE program would be extended beyond September 2016. Investors should watch for hints from Draghi that additional easing will be implemented before long.
- “We expect the ECB to extend QE in the first quarter of 2016 and this should help reinstate the negative relationship between the EUR and QE.”
NOMURA (Nick Matthews)
- WHEN: The ECB may ease further by its March 2016 meeting at the latest. Whether policy makers act in December, or at least signal that further action will come in early 2016, may be a close call given the global developments and the stronger euro.
- HOW: Nomura expects the ECB to loosen policy further by extending asset purchases to end-March 2017 or beyond.
- IS A DEPOSIT RATE CUT LIKELY: Nomura doesn’t expect a deposit-rate cut to be part of the next round of easing.
- EXPECTATIONS FOR OCT. 22: The central bank will likely maintain policy, but may sound dovish and may emphasize its willingness and ability to act, if warranted. Nomura also expects to see a continued signal that the focus for the next round of easing remains on the flexibility of the asset-purchase program.
CITIGROUP (team including Guillaume Menuet)
- WHEN: Baseline expectation is for the December meeting.
- HOW: Expect ECB to announce that it intends to extend or expand asset purchases. An extension is slightly more likely.
- IS A DEPOSIT RATE CUT LIKELY: Not part of Citigroup’s baseline scenario. Some unexpected euro appreciation, together with more evidence of emerging-markets slowdown, could prompt a rethinking whether deposit rate at minus 0.2 percent is really the lower bound.
- EXPECTATIONS FOR OCT. 22: The central bank will likely conclude that more time is necessary before announcing further policy easing.
- “Increasing the size of the public-sector purchase program on Oct. 22 remains a possibility for the GC, but the hurdle seems higher.”
MORGAN STANLEY (team including Elga Bartsch, Hans Redeker)
- WHEN: If updated ECB forecasts in December show there are renewed downside risks to consumer prices, the ECB could act.
- HOW: If the ECB acts, expect a combination of a reduction in the deposit rate and faster debt purchases to be more effective than a simple extension of the program. It also might be easier to agree on for some of the hawkish members of the Governing Council, rather than an extension of the purchase program well beyond September 2016.
- IS A DEPOSIT RATE CUT LIKELY: Morgan Stanley attaches a probability of 1 in 3 to the ECB acting this week. If the central bank were to embark on concrete policy action, it would probably boost pace of QE above 60 billion euros per month, raise the overall size of the program beyond 1.14 trillion euros, and consider a reduction in the deposit rate to widen the pool of eligible assets the ECB can buy at shorter maturities. Morgan Stanley says a 10 basis point reduction in the deposit rate is likely to be the most effective measure to rein in euro appreciation.
- EXPECTATIONS FOR OCT. 22: The ECB is expected to stay on hold, while stressing its determination to act, if needed. The central bank may open the door further to possible policy action at December meeting.
RBC (Timo Del Carpio, Peter Schaffrik)
- WHEN: RBC expects further easing in December.
- HOW: Expect either a six-month extension, or even a rolling six-month extension until further notice.
- IS A DEPOSIT RATE CUT LIKELY: Short-end euro rates have become rich on the back of rate cut “fantasies.” If there’s any mention of “all options being open,” that would propel the market substantially higher and the short end even richer.
- EXPECTATIONS FOR OCT. 22: ECB to stay on hold. The lack of a conclusive message from economic data means policy bias is to stay “waiting and seeing.”
RBS (Giles Gale, Michael Michaelides)
- WHEN: Expect QE to be both extended, possibly to March 2017, and accelerated to 90 billion euros per month at the December meeting.
- HOW: By extending the program beyond September 2016 and increasing the monthly pace to 90 billion euros.
- IS A DEPOSIT RATE CUT LIKELY: Not RBS’s base case.
- EXPECTATIONS FOR OCT. 22: This meeting isn’t live for more action. Governing Council members have been categorical as can be expected that any extension isn’t yet on the table.
JPMORGAN (Gianluca Salford, Fabio Bassi)
- WHEN: The most likely dates for further stimulus are December this year, and January 2016.
- HOW: The bulk of any additional stimulus will have to come from an increase in government bond purchases, with the main bottleneck coming from the low stock of German bonds. It is doubtful the ECB will be in a position to deliver more than an increase of the monthly pace to 70 billion euros to 80 billion euros, and an extension to December 2016 or March 2017.
- IS A DEPOSIT RATE CUT LIKELY: It will be very difficult for the ECB to cut rates, after having delivered and maintained over the past year a consistent message that policy rates have hit a floor.
- EXPECTATIONS FOR OCT. 22: Expect Draghi to keep his options open.
SUNRISE (Gianluca Ziglio)
- WHEN: The best case for an extension is in March.
- HOW: ECB may go for an extension, while expanding the size of the program is very unlikely as the central bank will already find it hard to do 60 billion euros a month in purchases at year end.
- IS A DEPOSIT RATE CUT LIKELY: No, as policy makers have said they are done with rate reductions.
- EXPECTATIONS FOR OCT. 22: Don’t expect much from the ECB until year-end, as the central bank needs to see how the year-end/January base effects on energy inflation play out in early 2016.
UBS (Reinhard Cluse)
- WHEN/HOW: Don’t expect any change to QE, even in December. UBS’s base case is that the ECB will run QE in its current form of 60 billion euros per month until September 2016, followed by some form of tapering.
- IS A DEPOSIT RATE CUT LIKELY: No. When policy makers cut rates last year, Draghi said it is at the lower bound, a sentiment ECB Board Member Coeure repeated more recently. So any cut would come at the cost of ECB credibility.
- EXPECTATIONS FOR OCT. 22: Not adding new stimulus may disappoint some market participants, making it important the ECB carefully calibrates its message. Expect Draghi to leave the door open for more accommodation in December.
IHS GLOBAL INSIGHT (Howard Archer)
- WHEN: The ECB will most likely extend QE, possibly in December. If 3Q GDP growth holds up relatively well, policy makers may wait until the new year.
- HOW: Any further ECB action would be most likely through increasing and/or extending QE.
- IS A DEPOSIT RATE CUT LIKELY: Draghi has repeatedly stated that interest rates have reached their lower bound.
- EXPECTATIONS FOR OCT. 22: Draghi will deliver a dovish message, saying the ECB is focused on downside risks to euro-zone inflation and growth.
ABN AMRO (Hyung-Ja de Zeeuw, Nick Kounis)
- WHEN: Expect the ECB to announce an extended and larger QE before year-end.
- HOW: The central bank will extend the program beyond September 2016, and increase monthly purchases to 80 billion euros from 60 billion euros. Expect the list of eligible assets to be broadened to include more utilities.
- IS A DEPOSIT RATE CUT LIKELY: ABN Amro doesn’t think a deposit rate cut will be the ECB’s first port of call, but thinks it is certainly an option at a later stage.
- EXPECTATIONS FOR OCT. 22: The meeting could offer a clearer idea of future ECB action.