No free lunch at the ECB
Later on Thursday we get the final ECB meeting of the year, the policy decision will be announced at 1245 GMT, with President Draghi giving […]
Later on Thursday we get the final ECB meeting of the year, the policy decision will be announced at 1245 GMT, with President Draghi giving […]
Later on Thursday we get the final ECB meeting of the year, the policy decision will be announced at 1245 GMT, with President Draghi giving his press conference at 1330 GMT. No change in rates is expected, however, the key decision to watch out for is whether the Bank will extend its QE purchases beyond March 2017, when they are currently expected to expire.
Our view:
We think that the bank will err on the less dovish/ more conservative side for two reasons:
Between a rock and a hard place
Although the ECB may not want to continue its QE programme, it really has no choice. In contrast to the US, where the economy seems to be transitioning to one that relies on fiscal largesse rather than monetary largesse to unleash a new wave of growth, there is little chance of fiscal or structural reform in Europe in the coming months due to key political elections in France and Germany in May and September, respectively.
This does not mean that the ECB will sound happy about extending its bond purchases, we expect Draghi to reiterate that tapering is coming, but what he may not say is that with so many risks, particularly around the Italian banking sector, now would not be an expedient time for the ECB to reduce its monthly bond purchases. After all, Draghi is the one who said he would do ‘whatever it takes’ to save the euro area; this pledge is relevant as much now as back in 2012.
The market impact: What to watch
Ahead of the meeting:
If our view is correct, and Draghi announces a 3-month extension to the ECB’s QE programme, this is likely to be perceived as less dovish than expected, which could:
Overall, as Italian referendum concerns have not come to pass, the ECB has more wiggle room to deliver a mild, or conservative, extension to its QE programme. While the ECB can’t pull the trigger on tapering just yet, plans are likely to be afoot. Everyone will be watching to see how much of these plans Draghi is willing to give away later today.