ECB To Signal Dovish Stance As Weak Inflation Cloud Outlook

European Central Bank President Mario Draghi is likely to ignore the hawkishness surrounding the robust euro area economy to signal a dovish stance on Thursday, but focus would be on the wording of the forward guidance after policymakers agreed in December to ‘revisit’ it early this year.

Many observers and economists think it is a given that the ECB would end its massive stimulus sometime after September this year, the only question is “when?”. Most of them also expect an interest rate hike to come only in late 2019.

But, Draghi is unlikely to give a clear signal for the gradual winding down of stimulus, or tapering, this month as inflationary pressures remain weak in the 19-nation economy and the recent strengthening of the euro is likely to add to that.

“The most important message to watch will be whether Draghi confirms the October statement that there will be no sudden end to QE,” ING Diba economist Carsten Brzeski said.

“We expect him to do so as this would be the only way to – at least – temporarily get the genie back in the bottle.”

The rate decision announcement is due at 7.45 am ET in Frankfurt and Draghi is set to hold his customary post-decision press conference at 8.30 am ET.

The main refi rate is currently at a record low zero percent and the deposit rate at -0.40 percent. The marginal lending facility rate is 0.25 percent.

Headline inflation eased to 1.4 percent in December, which is well below the ECB’s goal of “below, but close to 2 percent”. In December, the ECB staff projections showed that inflation would remain short of its target into 2020, which Draghi called a “muted” news that warrants support from massive monetary stimulus.

The minutes of the December session showed members agreeing that the policy communication would need to “evolve gradually, without a change in sequencing, if the economy continued to expand and inflation converged further towards the Governing Council’s aim.”

Policymakers also expect the forward guidance to gain prominence, going forward. Rate-setters also stressed that it was important to reflect on “how to transition gradually from the present conditionality focused on asset purchase programme net purchases to a broader concept of forward guidance comprising various dimensions of the monetary policy stance.”

The size of the ECB’s monthly asset purchases was halved this month to EUR 30 billion, which will continue so until September.

The hawks on the Governing Council are apparently calling for an abrupt or early end to asset purchases due to the robust economic climate. The economy grew 0.6 percent in the third quarter.

“We doubt very much that the Bank will go back on its plans to buy assets until September: even the most hawkish members seem content to deliver this pledge, and so to renege on it could damage the Bank’s credibility,” Capital Economics economist Jennifer McKeown said.

“But it seems quite likely that it will remove its pledge to increase the APP [asset purchase scheme] if necessary.”

And the ECB is set to witness some change in its top brass this year and next. The hunt is already on for a successor for the bank’s Vice President Vitor Constancio, whose term expires in June this year. Next year, it will be Draghi’s turn.

Appointments to ECB’s top posts are of political significance. Reports suggest Germany is likely to back a Spanish candidate for the deputy post. In turn, Spain would support having Bundesbank’s Jens Weidmann at the helm.

The material has been provided by InstaForex Company – www.instaforex.com