ECB Monetary Policy Decision Due At 12:45 GMT, Press Conference Due At 13:30 GMT
- Unanimous expectations look for the ECB to leave its three key rates unchanged
- Focus will fall on what hints/if any Draghi delivers on the future path of the Bank’s PSPP
- Markets will also be looking out for any potential comments from the ECB President on the ongoing EUR appreciation
PREVIOUS MEETING: At the previous meeting, the ECB reiterated their existing guidance on asset purchases, upgraded 2017 through 2019 growth forecasts (2018 upgraded to 2.3% from 1.8%) with Draghi during his press conference stating that the ECB did not discuss a sudden end or an end date for asset purchases.
ECB DECEMBER MINUTES: The key takeaway was the Bank announcing that forward guidance and the language surrounding their policy stance could be revisited in the early stages of this year. Furthermore, the minutes revealed that communication would need to change but without changing sequencing.
SOURCE REPORTS: In the immediate aftermath of the December meeting, sources suggested that a minority of ECB Rate Setters wanted to signal guidance may change if inflation keeps accelerating but hawks were easily out-numbered and the debate was not heated. More recent source reports have suggested that the ECB are unlikely to drop the pledge this week to keep buying bonds until inflation heads towards target, with separate reports stating that the Governing Council are relatively relaxed about EUR appreciation; policy wording most likely changed in March.
DATA: From a data perspective, RBC highlight that the growth picture has remained strong with Q3 GDP recently revised higher to 0.7% (Exp. 0.6%), with the real test for the ECB to come throughout the year given their mammoth 2018 growth upgrade from 1.8% to 2.3%. Further to growth prospects, December PMIs revealed growth in the manufacturing sector at an all-time high with services at the highest since 2011 with HSBC suggesting that EUR appreciation is yet to dent Eurozone exporters. On the inflation front, things are perhaps less upbeat with December core CPI stuck at 0.9% for the third consecutive month and the potential for EUR appreciation to cap upside in inflation in the coming months.
CURRENT ECB FORWARD GUIDANCE (INTRODUCTORY STATEMENT)
RATES: We continue to expect them to remain at their present levels for an extended period of time, and well past the horizon of our net asset purchases. (Dec 14th)
ASSET PURCHASES: From January 2018 we intend to continue to make net asset purchases under the asset purchase programme (APP), at a monthly pace of EUR 30bln, until the end of September 2018, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim. If the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, we stand ready to increase the APP in terms of size and/or duration. (Dec 14th)
GROWTH: Risks surrounding the euro area growth outlook remain broadly balanced. (Dec 14th)
INFLATION: The strong cyclical momentum and the significant reduction of economic slack give grounds for greater confidence that inflation will converge towards our inflation aim. At the same time, domestic price pressures remain muted overall and have yet to show convincing signs of a sustained upward trend. An ample degree of monetary stimulus therefore remains necessary for underlying inflation pressures to continue to build up and support headline inflation developments over the medium term. (Dec 14th)
POTENTIAL ADJUSTMENTS TO ECB FORWARD GUIDANCE (INTRODUCTORY STATEMENT)
RATES: Guidance on rates is likely to be maintained with RBC highlighting that the most recent ECB minutes stressed that there will be no changes to the current wording on the sequencing of policy changes i.e. that rates will not be lifted until asset purchase have concluded. As such, focus on rates may well take a back seat this time round.
ASSET PURCHASES: Despite the December minutes release stating that guidance could be ‘revisited in the early stages of this year’, many feel that January is perhaps too early an opportunity for the Bank to unveil any major changes on this front with March seen as a more opportune time. HSBC state that a January adjustment is unlikely due to 1) disappointing inflation levels 2) the ECB will wish to avoid an ‘unwarranted tightening of monetary policy conditions. However, Pictet suggest that this meeting could see the removal of the ‘in terms of size’ option from their guidance.
GROWTH: Unlikely to see much in the way of changes this time round with Pictet looking for current guidance to eventually change to ‘upside risks to the euro area growth outlook are building’ if the 2018 growth picture develops as expected.
INFLATION: In-fitting with recent data releases, ING look for Draghi to maintain his existing dovish tone on inflation, pointing to still weak inflationary pressures whilst emphasising the disinflationary impact from the stronger EUR. However, UBS note that Draghi will most likely have to pay some acknowledgement to the recent climb in oil prices (currently 12% above ECB 2018 assumptions) and the potential impact on CPI going forward.
WHAT TO WATCH OUT FOR
DISCUSSIONS ON THE FUTURE OF THE PSPP: As discussed above, any changes to guidance in the Bank’s statement are likely to come at a later date or be minor at this stage. As such, a bulk of the focus instead will be on what/if any hints Draghi delivers on discussions about concluding the PSPP. Last time round, Draghi tried to downplay that such discussions took place and will most likely try and do the same this week in order to avert a tightening of monetary conditions. However, Draghi will have a tough time batting away questions from journalists given the December minutes which could see the ECB President pressed on the timing and scope of changes in guidance. HSBC highlight that at the October meeting, ‘Draghi had said that QE would not have stopped suddenly, but at the December one he refused to answer a similar question’. Therefore, any follow up to this will be closely watched by markets in an attempt to assess how much sway/if any the hawks are having on the debate at the Bank with recent rhetoric from uber-hawk Hansson continuing to bang the drum for a sudden conclusion to purchases. That said, ultimately, Morgan Stanley don’t expect any major shift in guidance until March (alongside ECB staff projections) with a clear statement on the timing of purchases not expected until June. Note: markets will also be on the lookout for source reports in the aftermath of the press conference if some of the hawks view Draghi’s communications as too dovish or not representative of the discussions that took place.
EUR EXCHANGE RATE: Another source of focus has been on recent EUR appreciation which has subsequently lead some of the bloc’s central bank heads to come out and comment on the matter. More specifically, the likes of Nowotny and Villeroy have suggested that the exchange rate must be monitored with Constancio adding that concern will only arise if movements in the EUR do not reflect market fundamentals. These comments were then followed up by source reports late last week suggesting that overall the ECB are relaxed about EUR appreciation. As such, the issue may not make it into the introductory statement but will likely be a topic of discussion in the Q&A (it is a rarity for the ECB to discuss the exchange rate in their introductory statement, additionally Draghi has often rebuffed questions on the matter by stating that the ECB does not target the exchange rate). If quizzed about the matter, Berenberg argue that Draghi is unlikely to raise too much alarm at this stage due to 1) the EUR only being 1.2% stronger than the rate used in December 2017 and 2) ECB calculations have shown that a stronger euro does not weigh on the Eurozone economy as much as in the past. Note, that if Draghi was to insert a comment on the EUR exchange rate into the statement, previous communication in September stated ‘the recent volatility in the exchange rate represents a source of uncertainty which requires monitoring with regard to its possible implications for the medium-term outlook for price stability’.
COMPOSITION OF PURCHASES: Another issue that Draghi could be quizzed on or feel the need to comment on is this year’s composition of purchases with the Bank yet to clarify the breakdown of purchases throughout the year. Berenberg highlight that based on purchase data this year, ‘data for January so far suggests that the cut in the purchase programme has fallen largely, if not completely on sovereign bonds –if one were to extrapolate the weekly data to the whole month, from currently EUR 50bln monthly down to EUR 20bln in 2018, with EUR 10bln monthly for the sum of corporate bonds, covered bonds and ABS.’ Therefore, journalists may chose to press the President on this issue to see if it is representative of the Bank’s purchases going forward.
As ever with the ECB, markets can see multiple waves of reactions throughout the decision and press conference. As discussed above, two of the key factors for markets to look at are the future path of the PSPP and the Euro exchange rate. If Draghi avoids any mention of or bats away questions about the Bank’s intentions for curtailing purchases later in the year (possibly allied with a cautious tone on the Eurozone’s inflation prospects), markets could interpret this as a dovish factor and subsequently could lead to selling pressure in the EUR, with strength in fixed income markets and equities. Conversely, if Draghi tackles the issue head on and hints that announcements will come in March or that the hawks are having an increasing sway on the future path of policy at the bank, then the opposite reaction could be seen. If Draghi attempts to talk down the currency then this could naturally lead to some selling pressure in EUR (however, this will be subject to the broader tone of Draghi’s statement as his efforts to talk down the currency in September failed after he was simultaneously upbeat on inflation). Finally, as a reminder, watch out for source comments in the hours following the press conference.