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30 Nov 2015
ECB Preview: Santa Mario is coming to Euroland - ING
FXStreet (Delhi) – Carsten Brzeski, Chief Economist at ING, suggests that after six weeks of speculation and pleasant anticipation, Mario Draghi will present the ECB’s QE2 on Thursday.
Key Quotes
“Developments that make doves cry. From a hawk’s perspective, macro indicators in recent weeks have done little to support the argument for more substantial ECB action on Thursday. Core inflation has continued to increase, inflation expectations measured in surveys are significantly higher than a year ago, and confidence indicators have performed better than expected. In fact, it even looks as if the ECB staff projections could be somewhat better than in September. Back in September, ECB staff had expected growth to come in at 1.7% and 1.8% over the next two years. Applying some back-of-theenvelope estimates and taking into account the changes of oil prices and the exchange rate, GDP growth could be revised upwards.
Developments that make doves laugh. However, if we believe the ECB’s official line, it is all about inflation. ECB staff had projected an average annual inflation rate of 1.1% in 2016 and 1.7% in 2017. Changes in the external assumptions could lead to even lower inflation rates, at least in 2016. Moreover, given the continued high unemployment and output gaps, we see little reason for inflation reaching 2% any time soon, unless commodity prices rebound strongly.
In the end, Mario Draghi usually laughs. Still, Draghi’s determination at the October meeting (and at public appearances since then), combined with underlying structural weaknesses in the economy and new uncertainties, have made monetary inaction nearly impossible. The depreciation of the euro since the October meeting (more than 4% in nominal effective terms) and the latest drop in government bond yields underline markets’ anticipation of a new ECB move. Any concerns by the hawks can easily be rebutted by Draghi, pointing to an unwarranted tightening of monetary conditions in case of nonaction. In this regard, the question of whether new measures would actually have any additional impact on growth and inflation has become of minor importance.
Will Draghi do it again? It looks close to impossible for Draghi not to deliver on Thursday. The more interesting issue is what the ECB will actually present and whether Draghi sticks to his track record from the last four years of always overachieving when it really counts. Two days ahead of St Nicholas’ Day, it is easy to draw a parallel between Draghi, markets, children and presents. Having roused our imagination since the October meeting, “only” delivering what markets are expecting could lead to some disappointment.
What we expect from Santa Mario. It is difficult to see a clear market consensus on what Santa Mario should bring on Thursday, besides the fact that EONIA forwards currently price in a 15bp cut in the deposit rate. In our view, Draghi will present a package of several measures: a minor increase in the size of monthly QE purchases, a deposit rate cut of at least 15bp, a refi rate cut of 5bp, an increase in the accepted amounts of banks’ liquidity on the ECB’s current account facility remunerated at the refi rate (to mitigate the negative impact of a deposit rate cut on banks) and the inclusion of regional bonds in the ECB’s monthly bond purchases.”
Key Quotes
“Developments that make doves cry. From a hawk’s perspective, macro indicators in recent weeks have done little to support the argument for more substantial ECB action on Thursday. Core inflation has continued to increase, inflation expectations measured in surveys are significantly higher than a year ago, and confidence indicators have performed better than expected. In fact, it even looks as if the ECB staff projections could be somewhat better than in September. Back in September, ECB staff had expected growth to come in at 1.7% and 1.8% over the next two years. Applying some back-of-theenvelope estimates and taking into account the changes of oil prices and the exchange rate, GDP growth could be revised upwards.
Developments that make doves laugh. However, if we believe the ECB’s official line, it is all about inflation. ECB staff had projected an average annual inflation rate of 1.1% in 2016 and 1.7% in 2017. Changes in the external assumptions could lead to even lower inflation rates, at least in 2016. Moreover, given the continued high unemployment and output gaps, we see little reason for inflation reaching 2% any time soon, unless commodity prices rebound strongly.
In the end, Mario Draghi usually laughs. Still, Draghi’s determination at the October meeting (and at public appearances since then), combined with underlying structural weaknesses in the economy and new uncertainties, have made monetary inaction nearly impossible. The depreciation of the euro since the October meeting (more than 4% in nominal effective terms) and the latest drop in government bond yields underline markets’ anticipation of a new ECB move. Any concerns by the hawks can easily be rebutted by Draghi, pointing to an unwarranted tightening of monetary conditions in case of nonaction. In this regard, the question of whether new measures would actually have any additional impact on growth and inflation has become of minor importance.
Will Draghi do it again? It looks close to impossible for Draghi not to deliver on Thursday. The more interesting issue is what the ECB will actually present and whether Draghi sticks to his track record from the last four years of always overachieving when it really counts. Two days ahead of St Nicholas’ Day, it is easy to draw a parallel between Draghi, markets, children and presents. Having roused our imagination since the October meeting, “only” delivering what markets are expecting could lead to some disappointment.
What we expect from Santa Mario. It is difficult to see a clear market consensus on what Santa Mario should bring on Thursday, besides the fact that EONIA forwards currently price in a 15bp cut in the deposit rate. In our view, Draghi will present a package of several measures: a minor increase in the size of monthly QE purchases, a deposit rate cut of at least 15bp, a refi rate cut of 5bp, an increase in the accepted amounts of banks’ liquidity on the ECB’s current account facility remunerated at the refi rate (to mitigate the negative impact of a deposit rate cut on banks) and the inclusion of regional bonds in the ECB’s monthly bond purchases.”