7 May 2014
ECB to keep door open to further action - Nomura
FXStreet (Bali) - According to Nick Matthews, European Economist for Nomura, the ECB is set to leave policy unchanged on Wednesday, but will keep the door open to further action in the coming months.
Key Quotes
We do not expect any change to policy when the ECB Governing Council meets at the National Bank of Belgium on 8 May. If correct, then we and markets will be on alert to the level of openness to any further policy action in June, both on the interest rate side and also potentially on the liquidity side because of recent money market developments.
While the April flash HICP inflation release (0.72%) suggests that inflation has not rebounded sufficiently to prevent a further downward revision to the ECB‟s inflation outlook, we expect the ECB to defer any possible action on interest rates until the June meeting to allow for a more complete assessment of all recent data from the updated June Eurosystem staff projections.
In our view, we expect President Draghi to express as dovish a stance as possible without pre-committing to any particular course of action at the next meeting, especially since ruling anything out at this stage could be counterproductive in terms of potential impact on the exchange rate. Therefore we think Mr Draghi will repeat the explicitly dovish insertions from last month, noting that the ECB does not exclude further monetary policy easing and that the Governing Council remains “unanimous in its commitment to using also unconventional instruments within its mandate in order to cope effectively with risks of a too prolonged period of low inflation”.
The three contingencies warranting monetary policy action spelt out during Mr Draghi‟s recent Amsterdam speech will likely feature too, as this was for the purpose of clarifying and explaining a more complex ECB reaction function. These contingencies were (i) unwarranted tightening of the monetary policy stance, (ii) further transmission impairments and (iii) a worsening of the medium-term outlook for inflation.
Key Quotes
We do not expect any change to policy when the ECB Governing Council meets at the National Bank of Belgium on 8 May. If correct, then we and markets will be on alert to the level of openness to any further policy action in June, both on the interest rate side and also potentially on the liquidity side because of recent money market developments.
While the April flash HICP inflation release (0.72%) suggests that inflation has not rebounded sufficiently to prevent a further downward revision to the ECB‟s inflation outlook, we expect the ECB to defer any possible action on interest rates until the June meeting to allow for a more complete assessment of all recent data from the updated June Eurosystem staff projections.
In our view, we expect President Draghi to express as dovish a stance as possible without pre-committing to any particular course of action at the next meeting, especially since ruling anything out at this stage could be counterproductive in terms of potential impact on the exchange rate. Therefore we think Mr Draghi will repeat the explicitly dovish insertions from last month, noting that the ECB does not exclude further monetary policy easing and that the Governing Council remains “unanimous in its commitment to using also unconventional instruments within its mandate in order to cope effectively with risks of a too prolonged period of low inflation”.
The three contingencies warranting monetary policy action spelt out during Mr Draghi‟s recent Amsterdam speech will likely feature too, as this was for the purpose of clarifying and explaining a more complex ECB reaction function. These contingencies were (i) unwarranted tightening of the monetary policy stance, (ii) further transmission impairments and (iii) a worsening of the medium-term outlook for inflation.