15.30 (GMT) Review Of The Meeting
At their July rates meeting the ECB opted to maintain policy at current levels with the council concluding that they didn’t yet have the information to make decisions. Draghi noted that the ECB judged that they needed more time to assess the state of market-based inflation expectations though the bank stood ready to act, using all the instruments in its mandate, if warranted. Referring specifically to Brexit Draghi noted that initial impact estimates should be treated cautiously and Brexit didn’t seem to have major impact on the inflation outlook.
Regarding inflation, Draghi noted that levels are likely to remain very low in the next few months but should pick up in 2017-18. The growth outlook was said to have risks tilted to the downside, largely due to Brexit, though data point to ongoing growth in Q2 albeit it at perhaps a slower pace than Q1.
Discussing some of the other issues facing the EuroZone Draghi noted that it was weak bank profitability, not solvency, that was the problem but that NPLs were indeed a problem that need to be addressed, with a high level of NPLs making banks especially vulnerable to the markets. The banking sector was judged to have reacted in “fairly resilient” fashion to Brexit and policy measures since 2014 have significantly improved borrowing conditions. Draghi also said it was essential that the bank lending channel continues to function well and that implementation of structural reforms need to be stepped up. Regarding the bank’s QE program, Draghi noted that the council judged TLTRO as quite successful.
In terms of broader threats to the EuroZone Draghi noted that it was very difficult to understand how geopolitical uncertainties affect the EuroZone but that recent events in Turkey could undermine confidence. Given these uncertainties Draghi said that it was important for a message of stability to come out of the G20.
In all the meeting was fairly muted and taken as less dovish than many were expecting with the bank sounding surprisingly un-phased by Brexit and downplaying the likelihood of future easing. Initial market reaction saw EUR bid though demand wore out as the NY session rolled o leading to EUR weakness into the London close.
10.30 (GMT) Preview Of The Meeting
Notes From The Last Meeting
ECB paused as expected, leaving main refinancing rate unchanged at 0.0% and deposit rate at -0.4%. President Mario Draghi left the door open for extension of the stimulus program if needed and commented that “UK should remain in the European Union, because the European Union would benefit from its permanence”, joining BOE in highlighting downside risks of Brexit. June’s macroeconomic projection foresee real GDP to increase 1.6% this year and 1.7% in the next two years, with this year’s forecast revised slightly higher from March forecast. CPI was also revised higher for this year to 0.2% in 2016 (previous 0.1%), but unchanged at 1.3% in 2017 and 1.6% in 2018.
Data & Developments
Since the ECB last met on June 2nd the European, and indeed global, financial landscape has seen a dramatic shift with the UK having voted to leave the EU. The aggressive market reaction, which emphasised just how unexpected the decision was, has since given way to a wave of growing expectations for further global central bank easing.
Data flow since the last meeting has been skewed to the upside with the key takeaway being a small uptick in inflation with the headline reading having moved out of negative territory.
EZ GDP 1Q 1.7% vs 1.5% exp
EZ CPI May -0.1% vs -0.1% and 0.8 vs 0.8 vs
EZ Manufacturing PMI Jun
EZ CPI Jun 0.1% vs 0 0.9% vs 0.8% core
Unemployment rate EZ 10.1% VS 10.2% prior
EZ Services & Composite PMIs Jun
EZ Industrial Production May 0.5% 1.3%
EZ Retail Sales 1.6% vs 1.7% May
During this period, we’ve also heard from a raft of ECB members. ECB’s Constancio reiterated the bank’s capacity to deal with the Brexit fallout noting that “We still have instruments in our toolkit” even if it is “true that we have been using a lot of those”. Mr. Nowotny, speaking just says after the Brexit results, said there had been an “overreaction on banks” and “we now see a period of cooler heads”. Mr. Hansson noted that the Brexit decision could disrupt the bank’s efforts to boost the EuroZone economy as “it’s one more factor creating uncertainty”. Mr. Hansson also stated that the bank “continue to monitor the trends on financial markets and if there is a need to provide additional liquidity.” Regarding the scale and effectiveness of current stimulus Mr. Hansson said “We have more…It’s just that much tougher in the current environment to make the last steps, visible changes in the headline inflation. We just need some faith and to take a bit more time.”
Expectations Ahead of The Meeting
Whilst markets expect that the bank will remain in wait and see mode, in line with the other G10 central banks, to allow for the assessment of further post-Brexit data before committing to a course of action, investors are expecting the ECB to outline their intention to roll out further measures in August/September. The investor reaction to Brexit has seen focus shifting on to the weaknesses within the region such as the debt-related challenges of the Italian banking sector and broader issues such as political and geopolitical instability.
Some analysts expect that the ECB will respond immediately in the wake of Brexit however there a few reasons which seem to suggest this course is unlikely. Firstly, the BOE themselves have yet to respond with any policy adjustment, secondly we have seen a fairly orderly response from periphery bond markets and finally the ECB are still waiting to assess how the launch of CSPP and TLTRO2 programmes have fared in terms of stimulating economic activity over the last few weeks.
Market response to Brexit, beyond the initial shock reaction, has so far been muted. The biggest destabilisation that has occurred is to investor confidence in the region and investor are now starting focus on some of the EuroZone underlying weak points which may cause trouble in a post-Brexit world such as the debt challenges of the Italian banking sector and wider issues such as Political and Geopolitical instability in the region.
Recent climbs in energy prices have stimulated a small increase in inflation and look set to prompt further increases but core inflationary pressures and inflation expectations remain heavily subdued.
Draghi to highlight downside risks, signal further easing
Given the broader outlook for the EuroZone it is likely that we see the ECB Chief highlighting the risks to both the growth and inflations forecasts and the likely necessity of further easing in the coming months.
Overall there is a small risk of EUR upside on the back of this month’s meeting, similar to the GBP reaction we saw in response to the BOE meeting earlier this month. EUR positioning remains skewed to the downside and if Draghi & co. fail to provide a clear catalyst for continued downside we could see a squeeze higher.
10.20 (GMT) Welcome to our day’s rolling coverage
Hello and welcome to our live coverage of today’s ECB Meeting, with Littlefish FX Analyst James Harte. Here are the key details for the day:
- European Central Bank Rate Decision July
- Thursday July 21st, 12.45GMT1
- Current rate 0%, expected unchanged