Thursday's ECB meeting is promising to be one of the most interesting for many a year, certainly since March 2016. A merging of political issues, economic concerns and a change of president are all coming together for a rendez-vous which may decide Eurozone monetary policy for many months and even years to come.
The last meeting in July, as expected, included a change in forward guidance, highlighting the potential for lower rates. This was seen as confirmation by the market that the ECB was preparing for easing at the September meeting when new macroeconomic forecast were set to be released.
With the German economy now in virtual recession and headwinds from a chaotic Brexit becoming stronger, the market expects Mario Draghi to deliver on his 'promise' and announce a large easing package. This will be one of the last steps he takes before stepping down at the end of October. Analysts believe the stimulus will come in several parts, consisting of a rate cut, a relaunch of net asset purchases (QE), strengthened forward guidance and some degree of rate tiering. This last measure would be to mitigate the negative impact to bank profitability.
Money markets are currently split on whether the ECB cut by 10 bps or by 20 bps, which would be the first cut since 2016. A new asset purchase program is also slightly contentious, not least because the ECB is getting close to the limit of buying on some government bond issuers.
Overall, it seems it will be hard for Draghi to deliver on very dovish market expectations. Recent ECB speeches suggest growing awareness within the central bank about negative side-effects from additional easing. In addition, yesterday saw an ECB 'sources' story stating that the ECB could delay the launch of fresh asset purchases by tying them to economic data.
That said, if the ECB is serious about closing the gap between inflation expectations and its own target, a large easing package is warranted, especially when the growth and inflation outlook is expected to take a beating in the new forecasts. And after the July meeting, any change in direction now would dent the Bank’s credibility and risk destabilizing markets.
With the many different policy measures up for debate, we would expect heightened volatility around the announcements and Draghi's subsequent Q & A session. The FX market will keep its focus on the rate cut, while bond markets will home in on the size of the QE programme.
Here are the numbers to know ahead of the statement at 11.45 GMT and President Draghi’s press conference at 12.30 GMT:
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