Notes From The July ECB 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.
Data & Developments
Following on from the ECB’s July meeting, which downplayed risks from Brexit, data since have indeed shown the EuroZone economy to have remained resilient in the wake of Brexit with a broad slew of data printing strongly. Despite a small tick down in August CPI estimates the ECB will likely be relieved by indicator readings since the UK’s decision to leave the EU.
- July EuroZone Services & Composite PMI’s better than expected
- July German CPI 0.4% YoY vs 0.3% exp
- EuroZone 2Q GDP 1.6% vs 1.5% YoY
- EuroZone July CPI 0.9% core YoY July
- German 2Q GDP 3.1% YoY vs 2.8% exp
- August CPI estimates slightly weaker 0.8% YoY core vs 0.9%
Of the various comments we have heard from ECB officials in recent months the most recent seem the most pertinent, coming from ECB’s Mersch, who warned against the use of “extreme measures” with “unacceptable side effects” to help back stop the EuroZone economy. Discussions of the growing inefficacy of central bank policy to achieve the desired affect has been a common theme of markets this year. So called “helicopter money” has previously been described by ECB chief Draghi as an interesting academic concept but has so far not been discussed by ECB policy makers.
Expectations For This Meeting
With data having remained resilient in the wake of Brexit and the Fed starting to sound more Hawkish it appears likely that the ECB will opt to remain in “wait and see mode” at this juncture and probably employ verbal easing over any actual policy adjustments.
Institutional forecasts are mixed with some banks expecting the bank to announce an extension of the QE programme, some expecting a further rate cut and some expecting no action at all. Positioning ahead of the meeting, whilst bearish, has shown a reduction of shorts over recent weeks as data points continued to improve, removing catalysts for further EUR downside.
The September meeting will include a lot more information than the previous meeting with the update of the ECB’s quarterly forecasts and also a press conference following the meeting.
In summary, not expecting further easing from the ECB this time around but expect a Dovish tone with the promise of more easing to come if needed. The quality of the ECB’s forward guidance will ultimately be the key determinant in the currency reaction we see but sense there is room for a spike higher in Euro if markets feel disappointed.