The BOC isn’t the only central bank that’s under the spotlight this week, since the ECB will also be delivering its monetary policy statement on Thursday at 11:45 am GMT, followed by a press conference shortly at 12:30 pm GMT.
And if you need a quick recap on what happened during the previous ECB statement and what’s expected this time around, then you better read up.
What happened last time?
- Refinancing rate maintained at 0.00% as expected
- Marginal lending rate maintained at 0.25% as expected
- Deposit rate maintained at -0.40% as expected
- QE extension at reduced pace of €15B per month until December reaffirmed
- Forward guidance that QE program will end after December reaffirmed
- Growth projections downgraded as expected
- Inflation forecasts unchanged as expected
- ECB still has hiking bias
- ECB repeated forward guidance that rates ain’t moving “through the summer of 2019″
As expected, the ECB announced during the September ECB statement that it was maintaining its monetary policy.
All policy rates were therefore kept steady while the ECB’s extended QE program will continue at a reduced pace of €15 billion per month (€30 billion originally) until the end of December 2018.
And after December 2018, the ECB reaffirmed that “net purchases will then end.”
As for future rate hikes, the ECB repeated its mantra that:
“[T]he key ECB interest rates [are] to remain at their present levels at least through the summer of 2019.”
Since everything was within expectations, the ECB statement was essentially a dud and most EUR pairs were just trading sideways.
However, the euro surged higher later since ECB President Mario Draghi said these rather positive things about the Euro Zone economy during the ECB presser.
“The incoming information, including our new September 2018 staff projections, broadly confirms our previous assessment of an ongoing broad-based expansion of the euro area economy and gradually rising inflation.”
“The underlying strength of the economy continues to support our confidence that the sustained convergence of inflation to our aim will proceed and will be maintained even after a gradual winding-down of our net asset purchases.”
Other than that, the ECB actually downgraded its growth forecasts to reflect rising protectionism (because of Trump). However, the ECB’s inflation forecasts were largely unchanged, so the ECB still has a hiking bias.
Also, a “buy the rumor, sell the news” event may have played out since there was a Bloomberg report the day before the ECB presser. And that report cited unnamed “officials familiar with the [ECB’s] latest projections” as claiming that the ECB will announce a downgrade for its growth forecasts.
And we now know that the Bloomberg report was the real deal since the ECB did slightly downgrade its growth projections.
So, what’s expected this time?
- No change in monetary policy expected
- ECB statement likely to be dud
- ECB presser more likely to be market-moving
Like last time (and several times before that), the general consensus is that the ECB will be maintaining its monetary policy, so the ECB statement will likely be a non-event.
However, the ECB presser could potentially be a market-mover, depending on what ECB President Mario Draghi has to say about the Euro Zone economy, as well as the Q&A portion of the presser.
By the way, there would be a link to a live stream of the presser here, if you’re planning to watch the event in real time.
How is the Euro Zone economy faring lately?
The ECB won’t be giving an update on its macroeconimic forecasts until December of this year. However, we can gauge how the Euro Zone economy has performed compared to the ECB’s September Staff Forecasts in order to guess if the ECB will present a downbeat or upbeat assessment.
- GDP for the whole Euro Zone expanded by 2.1% year-on-year in Q2 2018, so GDP growth is beating the ECB’s 2018 forecast of +2.0%.
- The Euro Zone’s jobless rate came in at 8.1% as of August, which is beating the ECB’s forecast of 8.3% by year end.
- Headline HICP, meanwhile, rose by 2.1% year-on-year in September, which is well above the ECB’s median forecast of 1.7%.
- HICP less energy, one of the ECB’s preferred measures for core inflation, came in at +1.3%, which is meeting the ECB’s forecast
- HICP less energy and unprocessed food, another of the ECB’s preferred measures for core inflation, came in +1.1%, which is also meeting the ECB’s forecast
Given the above, it looks like the Euro Zone economy is evolving mostly within (or better than) the ECB’s expectations. It’s therefore likely that the ECB will present a positive assessment of the Euro Zone economy.
What to watch out for during the Q&A portion
Aside from the ECB’s assessment of the Euro Zone’s economy, the topics below may either be bullish or bearish for the euro, depending on what Draghi has to say.
1. Risks to the growth outlook
Last time around, the ECB maintained a “balanced” outlook for the Euro Zone economy while expressing some concern about trade-related risks, which prompted the ECB to slightly downgrade its growth forecasts.
However, the ECB meeting minutes revealed that some ECB member may be more worried about the Euro Zone’s growth prospects since:
“[I]t was remarked that a case could also be made for characterising the risks to activity as now being tilted to the downside given the clear prevalence of downward global risks.”
However, that was before the Brexit talks stalled and before the ongoing trade war between the U.S. and China escalated.
Draghi may allude to these downside risk to growth during his introductory speech at the presser. But if he doesn’t, then he will likely be asked about them during the Q&A portion.
2. Italy’s budget
Draghi was asked about Italy’s budget plan during the previous ECB presser, but Draghi basically said that the ECB was in wait-in-see mode since Italy hadn’t fleshed out its plans back then.
Well, we now know that the E.U. has rejected Italy’s budget, so market players are interested to hear what the ECB has to say about that, particularly if Italy’s budget drama may cause the ECB to act differently, as well as whether or not Italy’s budget drama may lead to a contagion.
3. Future rate hikes
Draghi said during a September 24 speech that he sees a “relatively vigorous pick-up in underlying inflation,” which triggered speculation that the ECB will be ready for a rate hike by September 2019, market analysts say.
ECB Chief Economist Peter Praet would later try to downplay Draghi’s comments during a September 25 presser by saying that “There was nothing new” to Draghi’s views.
And Draghi himself later toned down his message during an October 12 speech by saying that “underlying inflation is expected to pick up towards the end of the year and then increase gradually over the medium term.”
Journalists may ask Draghi what the change in tone is all about and whether or not the ECB still has a tightening bias.