ECB Preview: Timing is everything - Rabobank

Elwin de Groot, Senior Eurozone Strategist at Rabobank, suggests that there has been quite some speculation in financial markets in recent weeks that the ECB could announce policy changes as early as Thursday.

Key Quotes

“This is centered around two lines of thinking. The first is that the economic recovery is feeble, inflation is not going anywhere (“has failed to show a convincing upward trend” in the ECB’s own words) and that the ECB’s purchase program officially ends in March 2017 and, hence, is up for extension/expansion. The second line of thought simply argues that, due to the straightjacket of its purchase program, the ECB may be running into supply issues any time soon and thus needs to tweak the parameters of its program, regardless of the extension question.

Whilst we do not completely disagree with both lines of thinking, we believe timing (and communication) in this regard is essential. On the premise that ECB staff projections will be adjusted only modestly and that the ECB may be wary of creating undue expectations, we conclude that it is too early for the ECB to give the market what it wants. First, because whilst uncertainty with regard to the (global) growth outlook is high, the ‘Brexit’ referendum impact has actually proved modest. Second, because ‘going (way) before the Fed’ could be viewed as spilling ammunition.

Note the similarity with the situation almost a year ago. We think the Governing Council is keen to avoid a repeat of October 2015, when the market ‘ran away’ with the prospect of more easing measures, which ultimately led to disappointment when the ECB announced these measures in December.

The questions of whether the ECB’s current monetary stance is sufficient and whether the parameters of its purchase programme need to be tweaked in order to accommodate that stance are unlikely to go away. But we feel that the ECB will create itself more time to prepare a more thorough medium-term action and communication plan.”