ECB's Draghi to Favor a Balancing Act as Policy Seen on Hold

Oil price weakness has lowered the bar for further ECB easing but don't expect any additional policy moves just yet

European Central Bank President Mario Draghi Announces Interest Rate Decision
Photographer: Jasper Juinen/Bloomberg

Europe Central Bank president Mario Draghi will likely say the bank is ready to act but will be mindful of pre-committing to more action at Thursday’s press conference after December’s policy measures fell short of heightened market expectations.

The bank will ease further in 2016, according to 61 percent of economists surveyed by Bloomberg; of those expecting more stimulus, 45 percent expect additional measures in March and 34 percent say the bank will wait until June.

Fresh oil price weakness has lowered the bar for further ECB easing, economists said last week

Draghi will announce interest rates on Jan 21. Here's what analysts expect him to say:

Goldman Sachs (Dirk Schumacher)

What will the ECB do this week?

  • Stay on hold, leaving deposit rate at -30 basis points, with no changes to the existing bond purchase program.

Is more easing off the table?

  • ECB to announce to extend asset purchases to September 2017, with the June 2 meeting the most likely date for announcing further policy measures.

What would trigger more easing?

  • The price oil during the second quarter of the year is likely to drive the debate over further easing steps.

JPMorgan (Greg Fuzesi)

What will the ECB do this week?

  • The ECB will stay put, but monetary policy remains highly sensitive to a shift in the medium-term inflation outlook.

Is more easing off the table?

  • The bank may cut its deposit rate by 10 basis points and extend its easing program by six-months in June.

What would trigger more easing?

  • The inflation outlook will be the key trigger. If growth falters the bank could announce more measures in March.

BofA (Gilles Moec)

What will the ECB do this week?

  • Draghi will have to speak dovishly to counter the view that the ECB’s options are being constrained by the hawks on the General Council.
  • He may also echo ECB Executive Board member Yves Mersch, saying in theory the lower bound in rates hasn’t been reached.

Is more easing off the table?

  • The ECB will do more by the end of the spring, possibly as soon as March. The minutes of the bank's December suggest that deposit rate cuts are possible but the size of any cut is limited so QE will be the focus of any further easing.

What would trigger more easing?

  • If market dislocations continue or if real economy data starts plunging, March meeting may become “live”.

Citigroup (Giada Giani, Guillaume Menuet)

What will the ECB do this week?

  • Not expecting any policy change yet even with the severe downside risk to inflation.

Is more easing off the table?

  • More action will come soon and March is a real possibility, even if not Citigroup's main scenario.
  • Any further measures could include QE expansion. And there’s a rising chance of a deposit rate cut.

What would trigger more easing?

  • A fall in oil prices combined with core inflation weakness pointing to new inflation target shortfalls.

Barclays (Philippe Gudin, Antonio Garcia Pascual)

What will the ECB do this week?

  • The bank will stay on hold as will likely wait several months to see impact of December's action.

Is more easing off the table?

  • Expect the ECB to ease policy further in 2016 as deflationary pressures worsen although it's unlikely before June.
  • Could announce some changes to QE as soon as March, as part of its semi-annual review.

What would trigger more easing?

  • Another bout of Real Effective Exchange Rate euro appreciation or a further significant drop in inflation expectations.

Morgan Stanley (team including Elga Bartsch)

What will the ECB do this week?

  • Expect ECB to simply reiterate that it has an easing bias and to acknowledge some of risks to the growth and inflation outlook that have emerged since early December, notably the drop in oil prices.

Is more easing off the table?

  • While don’t rule out additional ECB policy action this year, a move as soon as March would probably be rushed and another step in June or July is more likely.

What would trigger more easing?

  • Downside risks to inflation will likely reignite the debate on additional ECB policy action in March; the days of ECB persistently outdoing market expectations likely to behind us.

Deutsche Bank (Marco Stringa, Mark Wall)

What will the ECB do this week?

  • Don’t expect a change in the ECB monetary policy or a clear signal of further easing.

Is more easing off the table?

  • Base case is that ECB easing is done although the risk of more action is material.

What would trigger more easing?

  • ECB will wait for more visibility on China, the oil price shock and inflation expectations with the latter crucial for determining the right response to the second one.

HSBC (Fabio Balboni, Karen Ward)

What will the ECB do this week?

  • No new measures will be announced this week, a view reinforced by last week’s ECB account of the December meeting.
  • Draghi to acknowledge the downside risks to inflation.

Is more easing off the table?

  • Not yet. HSBC expects further stimulus in spring, with deposit rate cuts the most valuable tool in ECB kit.

What would trigger more easing?

  • A downward revision in inflation forercasts would leave the ECB with little choice but to act.

Commerzbank (Michael Schubert)

What will the ECB do this week?

  • Expect no new steps. Draghi will probably keep all options open while avoiding clear signals.

Is more easing off the table?

  • Advocates and opponents of further measures will probably agree to wait for ECB projections to be updated in March before discussing further steps.

What would trigger more easing?

  • Those who favor additional measures will likely point to the still very low level of consumer price inflation.

Credit Agricole (Louis Harreau, Valentin Marinov)

What will the ECB do this week?

  • Draghi may consider a more dovish rhetoric as part of press conference; this should keep EUR a sell.
  • Euro Nominal Effective Exchange Rate is back at levels where the ECB intervened verbally in the past.

Is more easing off the table?

  • ECB is unlikely to change its monetary stance dramatically over next 12 months.

What would trigger more easing?

  • Expect ECB to extend QE by a further 6 months to Sept. 2017 if CPI disappoints.

Nomura (Nick Matthews, Norbert Aul)

What will the ECB do this week?

  • Don’t expect any policy changes even as a clear easing bias will remain, with the General Council repeating that, if warranted, it’s willing to act.

Is more easing off the table?

  • Further changes to QE duration were left on the table in December and there are no indications that -30 basis points represents any threshold for the deposit rate.
  • More easing on both fronts is possible and likely.

What would trigger more easing?

  • Pressure on the General Council to do more will likely increase in the first half of the year as inflation/inflation expectations drop.

Intesa Sanpaolo (Anna Maria Grimaldi)

What will the ECB do this week?

  • At most, the ECB will acknowledge recent developments on the international scenario, risks to growth and inflation shifted downward.
  • Will want to avoid fueling excessive expectations again.

Is more easing off the table?

  • More action in March would appear premature given the deep divide between policy makers in last week’s accounts and the technical constraints to lifting the monthly pace of QE beyond end-2016.

What would trigger more easing?

  • The ECB could cut the deposit rate if euro-area quarterly growth stabilized at 0.3/0.4 percent. It may inject more stimulus if global environment creates downside risks and/or financial conditions become more restrictive
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