ECB Preview: 11 Major Banks expectations from June meet

As we are marching towards ECB’s June meeting, we are listing down the expectations as forecasted by the economists and researchers of 11 major banks.

Most of the banks expect that ECB is unlikely to spring any hawkish surprises and is likely to keep its key policy rates and the asset purchase programme unchanged. However, the bias that comes through in President Draghi’s press conference will be very closely examined.

HSBC

We expect inflation forecasts to be nudged down, growth unchanged. Although cyclical indicators have strengthened again, we don't expect any changes to the growth forecasts.  Lower inflation should fit with the ECB's concern that a self-sustained return of inflation to target is far from assured.  Wage pressure and core inflation remain subdued. Indeed, the fact that an improved growth outlook has not lifted inflation prospects is now a key part of the ECB's story. Our central case is that there will be no significant changes to forward guidance.  Instead, the ECB may simply tell us that it discussed exit strategy and, when the time comes, exit will be gradual and data-dependent.  We also assume that the ECB will continue to argue that the -40bps deposit rate is not adversely affecting the efficacy of monetary policy. If our central case is wrong and there is a change in wording, we think dropping the clause that key policy will remain at present or lower levels "well past" the horizon of net asset purchases would make most sense.  This could increase policy flexibility once QE is fully tapered.  

Danske Bank

We expect a hawkish tone from the ECB at the meeting in June after it was perceived as slightly dovish at the latest meeting. In our view, sticking to this guidance and instead delivering another hawkish twist to the introductory statement is most likely. We expect the ECB to argue that the options provided for further accommodation are less likely to be used.

Rabobank

In our view the ECB is set to change its risk assessment for economic growth to "broadly balanced", but will probably refrain from changing the forward guidance language and the inflation risk assessment.  Bringing the latter to "broadly balanced" would be a strong signal to start tapering QE early next year. We expect the ECB to adjust their risk assessment for economic growth to “broadly balanced” on Thursday; this is the next ‘babystep’ towards a gradual exit from extraordinary policy

Nomura

We think the ECB is unlikely to spring any hawkish surprises at the Governing Council meeting on Thursday 8 June. All its key policy rates and the asset purchase programme are likely to be left unchanged. And President Draghi will be keen to impress that the euro area’s economic conditions – and its inflation level in particular – do not yet warrant any major shift in monetary policy. However, we are expecting some subtle shifts in the language of the ECB’s forward guidance. Specifically, we expect the words “or lower” to be removed from the existing wording. This shift will likely accompany a more balanced assessment of the growth outlook. And this in turn should reflect the underlying improvements that have unfolded in the macroeconomic picture over the past several weeks.

TDS

We look for the ECB to keep rates and the planned pace and duration of QE unchanged at this week’s meeting. What will be watched more closely is the ECB’s language around the risks to growth and the easing bias and forward guidance around rates and QE. Here we look for the risks to the growth outlook to be upgraded to broadly balanced, in line with 90% of other analysts surveyed, but we look for the easing bias on rates and QE to remain in place, whereas about half of all analysts are looking for the ECB to drop the easing bias on rates. We also look for the ECB to stick with the forward guidance on sequencing as previously laid out, that rates will not rise until “well past the horizon of asset purchases.” This should leave a dovish tone as markets remove some of the rate rises that are priced in for 2018. While positioning suggests rates would have an easier time responding to a hawkish message, we think a lack of change to rate guidance should send bund yields back to the lower end of the range.

Scotiabank

No ECB policy change is expected but the bias that comes through in President Draghi’s press conference will be very closely examined. Amid waning inflation—both hard readings and market-derived expectations shown on the front cover—it is likely premature to expect a shift in tone toward teeing up an eventual exit path.

BBH

ECB is expected to modify its language on the outlook for interest rates and its risk assessment. The ECB has told investors that interest rates will remain at present or lower levels if needed.  It can drop the downside bias.  The market has effectively done this already. The ECB would be validating what the market has done.  The ECB has indicated that downside risks have diminished, and the ones that exist stem from exogenous factors (maybe Brexit, US trade policy, China's economy).  It could say the risks are balanced, and it would be a small incremental change. In fact, such expectations seem so widespread that if the ECB do not make these changes, it may be seen as dovish, even though making these minor changes are not exactly hawkish.  The ECB's staff will update its forecasts.  Growth forecasts may be revised a little higher.

BAML

If it was just about the data flow and Mario Draghi’s recent statements, we would conclude that the ECB does not need to change its forward guidance at all next week, and that the only alteration to its communication could be the acknowledgement that the balance of risks on the outlook for the real economy has turned neutral, from negative. Indeed, core inflation for May missed the consensus’ low expectations and returned below 1%, where it has been since mid-2014. We concur with the ECB’s warnings against the labour market’s softness and ensuing weakness in wage growth, supporting Draghi’s insistence at the EU parliament on the need for “an extraordinary amount of monetary policy support, including through our forward guidance”. ECB will remove some of the asymmetric elements of its forward guidance–that policy rates could go lower. Still, we think that the balance of risks lies more towards an even more dovish outcome (no change at all to forward guidance, with Draghi merely admitting a “discussion” on the subject in the Q&A) than towards a more hawkish stance (with for instance an immediate removal of the notion that policy rate hikes would have to wait “well after” the end of QE).

SocGen

Since our own inflation forecast for 2019 is at 1.5%, maybe it’s unfair to suggest the downward revision of the ECB’s forecast (and the way it seems to have leaked into the press) is intended to help offset the shift in the risk assessment. But it probably is far to suggest that the ECB wants to avoid a major market reaction to the move, and the press conference may also be used to that effect. The ECB won’t want the Euro to strengthen too much before they start open discussions about the timing of the next reduction in the pace of bond purchases.

Natixis

Mario Draghi may have prepared the markets too much for a dovish meeting by stating before Parliament that monetary conditions need to remain very accommodating for the time being. And yet, with a series of good figures at European level, and a political risk as we wait for Italy, that is no longer systemic, the ECB should get back to a more normal attitude. It should publish new growth and inflation outlooks. Growth should be revised upwards while inflation could go in the opposite direction after a CPI Flash at only 1.4% in May even if this slowdown was broadly expected. As far as the press release is concerned, with a set of risks that could now be described as balanced, another stop should be taken. The market could react somewhat in an upwards direction, and the eonia curve could pick up a little.

RBC CM

This week’s ECB meeting again takes place against a backdrop of strengthening growth but subdued inflation. Markets are focusing on a few things: (1) what will happen to the forward guidance, (2) what will happen to the economic and inflation assessment. An upgrade to the economic assessment is very likely and should be widely expected. That in turn should see some change to the forward guidance but our rates team look for it to be at the lower end of expectations (dropping ‘or lower’ when describing future rates but not going further). We look for Draghi to ram home the message that the ECB is still far from meeting its mandate on inflation.

Click here to read special preview of the ECB Interest Rate Decision from our Chief Analyst Valeria Bednarik titled “ECB Meeting: time for stubborn Draghi to change rhetoric?”