With the ECB announcement due in a few minutes, followed by Draghi's press conference, today's ECB meeting should be a relatively dull affair as they are currently in 'wait and see' mode with regards to previous policy actions. As RanSquawk notes, general consensus among analysts is that the ECB are to keep rates on hold this month and avoid added stimulus.
- ECB's rates are currently: Refinancing 0.00%, Deposit -0.40% and Marginal Lending 0.25%
- General consensus among analysts is that the ECB are to keep rates on hold this month and avoid added stimulus, given the significant nature recent action
- The recent uptick in energy prices is expected to be reflected in the ECB staff projections but Draghi will need to be careful not to dampen market expectations for further easing with overtly bullish inflation expectations
Heading into the meeting, expectations are for the ECB to stand pat on existing policy with no changes to rates or further additional stimulus measures. This is largely as a result of rates already residing in firm negative territory (a particular concern raised by many participants and figureheads) and some of the measures announced in March yet to come into effect with corporate bonds purchases to commence this month and further TLTRO allotments. Furthermore, the recent uptick in energy prices are likely to be used by the central bank as a reason to be optimistic for the Eurozone outlook and is also expected to be reflected in the latest ECB staff projections . More specifically, the ECB staff projections for inflation are expected to receive an upgrade for the first time since 2015 with Citi looking for the ECB to lift their 2016 inflation outlook from 0.1 % to 0.3%, 2017 to 1.5% from 1.3% and 2018 to 1.8% from 1.6%. On the growth front, Morgan Stanley suggest we are likely to see an upgrade in growth forecasts due to strong performance at the start of the year, however, also warn that Eurozone growth shows some signs of slowing down compared to the first quarter.
Although it is highly unlikely that we will see further measures unveiled at this meeting, there are expectations for the ECB to ease at some point this year with JP Morgan suggesting the 2018 inflation forecast could set the backdrop for eventual further measures in September. In terms of measures that may be discussed at this meeting (although no agreement/announcement will likely be made), one avenue the ECB could explore and has often been touted as a potential course of eventful action is 'Helicopter Money' . Note, that this is an option which has been touted by a minority of market commentators and not the ECB themselves with ECB's Draghi, Coeure, Villeroy and Weidmann stating that this option has not been discussed and is not being considered and therefore any participants looking for helicopter money to have been discussed this time round are likely to be left disappointed. However, it is possible that Draghi could be questioned on the matter during the Q&A as a potential mechanism to soften the EUR and help revive inflation if necessary. .
One item that has been touted to be on the agenda is the possibility of reinstating the waiver on Greek bonds as collateral by the ECB (removed in Feb 2015). This comes in the wake of Greece striking a deal with creditors to release EUR 10bIn in bailout funds and contemplate methods to restructure the nation's debt pile. Last year, ECB's Constancio said that the waiver would be reinstated if the central bank viewed their programme to have been credibly implemented; a premise which many feel has been met. The main benefit for this would be that Greek banks would not have to seek funds from more costly emergency loans and instead could access cheaper loans like other nations in the monetary unions . However, the most recent source reports suggest that Greece is unlikely to have the waiver reinstated due to a snag in negotiations between Greece and their creditors . Furthermore, even in the event that the waiver was reintroduced, this would not immediately make Greek bonds eligible for ECB QE purchases as previous purchases exceed limits imposed by the ECB.
This meeting will likely also centre on some of the technical aspects of current stimulus measures such as corporate bond buys with recent source comments suggesting the pace of ECB corporate bond purchases will start at a slow pace with the pace to eventually pick-up to EUR 5-10bIn.
Market Reaction
In terms of a market reaction, many analysts have touted that this meeting is likely to provide fewer fireworks than some of those seen in the past year given that rates are expected to remain on hold and no new measures are expected to be announced. Attention instead, will likely centre on what potential measures could lie ahead with potential clues coming from the latest ECB staff projections. If the projections are seen as overtly bullish then this could dampen expectations for future ECB measures and as such provide some support for EUR , while weighing on equites and fixed income markets, with the converse expected if the forecasts underwhelm the market. Furthermore, if Draghi is particularly dovish in the press conference by suggesting the ECB could consider Helicopter Money further down the line or hammer home the point that the ECB will do whatever is necessary in order to fulfil its inflation mandate, then this could weigh on EUR while supporting equities and fixed income markets.* * *
Finally, here is the somewhat more skeptical take from Bloomberg's Richard Breslow:
When the European Central Bank discusses the outcome of its June meeting it’s pretty much accepted that the level of negative rates and size of asset purchases will stay unchanged. Thanks for small favors.
There’ll be plenty of important ancillary issues, such as staff projections, Greek bonds as collateral and plans for corporate bond purchases. Plenty of opportunity to spin marginal victories and progress.
What he’s unlikely to do is the one thing that has a hope of getting the council closer to its inflation mandate and the sclerotic European economy out of its perpetual malaise: actively talk down the currency.
There’s more likely to be the “where’s fiscal policy” complaint. A well-worn substitute for doing something that would be an extraordinary monetary policy that’d do some good.
We all know the lack of structural reform and infrastructure spending has been a sin. Deaf ears hear no lecturing.
There’ll be the usual insistence that negative rates have been having an effect. Truth is, it’s been a bad one. Further crippling already weak banks and insurers is not going to get them to lend and underwrite.
New staff projections could read bullish by not lowering, yet again, the inflation outlook. There’s nothing in the numbers that suggests upward pressure from wages or corporate pricing power. Real signs of progress. Higher oil prices are window dressing to the headline number. Core CPI has had one print above 1% in close to three years.
The growing percentage of European corporate bonds with negative yields is staggering. This is all down to the ECB’s purchases. The fantasy that it would provoke real corporate investment is laughable. It’s also exporting asset market distortions globally.
Germany aside, Europe must become more competitive. Look at the latest OECD projections on global trade and ask how much longer we can stand an unhealthy union.