In advance of tomorrow’s European Central Bank (ECB) meeting, Stewart Robertson, senior economist at Aviva Investors, offers his views:
“There is little doubt that the ECB will provide some additional monetary policy stimulus at Thursday’s meeting of the Governing Council. This will be Draghi’s last meeting as the head of the Bank before he passes the baton on to Christine Lagarde. The only debate is about the form of the easing that will be provided. How swiftly things change: it was all so different 18 months ago. At the start of 2018, everyone was optimistic about the Eurozone’s prospects. After a year of stellar growth (for the Eurozone at least) in 2017, the path seemed clear for the ECB to prepare the ground for lift off. After a decade in the doldrums, the economy was booming and the ECB could taper its asset purchases and start to push policy interest rates up from historic lows.
“The change in stance has been brought about by renewed economic stagnation in key areas, persistently low inflation and downside risks to growth from trade and tariff worries as well as the cyclical downswing within manufacturing and industry. Hard though it is to believe, with the key ECB deposit rate at -40 basis points (bps), further monetary easing is merited. Markets expect no less – in fact there is scope for disappointment if financial markets decide that any ECB actions are insufficient. It is not easy to determine exactly what the market is expecting, but a cut in the deposit rate to -50 bps (mitigated by the introduction of some form of tiering to protect weaker banks) and an announcement of a resumption of QE in the near future (perhaps €30bn a month) is probably the minimum that will be needed for insatiable markets. The ECB may also engage in some linguistic games in terms of the language they use, providing heavy hints that they stand ready to continue to provide support for some time yet. And they will present any actions against the backdrop of yet another downgrade in official forecasts for both growth and inflation.
“As always, the devil will be in the detail. Over his eight-year term, Draghi has on many occasions provided a presentational masterclass, easing markets’ concerns and calming the mood whether actions have been undertaken or not. But he has not been perfect – there have been times when the market reaction has not been what the ECB would have wanted. It is likely that these have been those times when there have been stark differences of view among ECB members and when Draghi has attempted to find a convincing and credible middle ground. Most of the time he has achieved this and he has improved over the years. But it is no secret that there are once again a range of views across the ECB council. His last meeting will be watched closely to see if he can pull it off for the final time. Lagarde is a hugely impressive public speaker too, but the ECB is a new role for her. She would do well to watch and learn from Draghi if he is at his impassive and impressive best.”
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