ecb sep rate decision preview
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ECB President Mario Draghi is scheduled to step down at the end of October. (Photo: Harry Daniels)
ECB President Mario Draghi is scheduled to step down at the end of October. (Photo: Harry Daniels)

- 10bp Cut Expected For Deposit Rate

- Tiered Deposit Rate Could Accompany Reduction

- Centrist Resistance May Impede New QE

- Repricing Of TLRTOs Possible

- Forward Guidance Seen Turning Even More Dovish

- Staff Projections Likely To Show Slower Inflation, Growth

- Rate decision due at 11.45 GMT Thursday, press conference to follow at 12.30


Frankfurt, 11 Sep (LS NEWS) – The European Central Bank is widely expected to change interest rates for the first time in more than three years by lowering its overnight deposit rate 10 basis points to -0.50pct, but analysts suggest that central bankers may offer less monetary stimulus than the market anticipates.


The bank announced a shift to an easing bias in July and noted that it was studying possible tiering for the deposit rate and a reintroduction of an asset purchasing programme similar to the one that ended in December.


“While we already expect a generous easing package to be delivered, consensus expects an even more dovish ECB,” Nomura said. “Markets have once again set a high bar for the central bank and we think expectations are likely to be missed.”


Danske Bank said, “Ultimately, the market reaction will depend on the ECB’s credibility, willingness and commitment to do ‘whatever it takes’ and, in our view, sending these signals is more important than the exact design of the measures.”


Just over seven years ago, ECB President Mario Draghi famously said the ECB “is ready to do whatever it takes to preserve the euro.”


Hawks v Doves, The Forever War


Dissent among members of the bank’s governing council, which was set to begin monetary policy deliberations Wednesday, has raised doubts about the extent of the measures the Eurozone lender of last resort will announce this week.


Draghi said in July that a number of governing council members were questioning the breadth of a possible monetary stimulus package. Following the last policy meeting of euro area central bankers, he also noted that the council had not discussed a reduction of the deposit rate.


ING Chief German Economist Carsten Brzeski said, “There seems to be a broad agreement at the ECB to do something this week. However, the latest comments by several hawks suggest that there still is a heated debate on which policy measures the ECB should implement.”


He cited recent statements opposing more QE from card-carrying hawks Jens Weidmann from Germany, Klaas Knot from Netherlands, and Sabine Lauthenschläger, a member of the ECB's executive board.


Brzeski pointed out that traditionally less hawkish ECB members like Francois Villeroy de Galhau of France and Mads Müller from Estonia have also come out against QE, but he added that neither has a vote at this week’s meeting.


“Even if the group of QE-skeptical hawks has grown, it still looks like a vocal minority. With inflation expectations probably deviating further from the ECB’s target, there will in our view be a vast majority in favour of new action. And despite the hawks’ opposition, it is doubtful that only a rate cut will be sufficient.”


Kit Juckes, global fixed income strategist at Societe Generale, said any ECB action may be moot: “The ECB is likely to throw the kitchen sink at the economy, with a new QE programme and a rate cut, but at the risk of sounding like a broken record, it's the fiscal bazooka that's needed now, not the worn out monetary one.”


Analysts said they expect ECB staff to lower projections for Eurozone inflation and economic growth this week. (See June projections below.)

The preliminary Eurozone inflation report for August showed a headline reading of 1pct, which was unchanged from July, leaving consumer price growth well short of the ECB target of near but below 2pct.


Annual Eurozone GDP growth fell to 1.2pct in the second quarter following 1.3pct in the previous period. Germany, the Eurozone’s largest economy, reported an annual rate of GDP growth of 0.4pct in April-June. The quarterly rate fell to -0.1pct, and a number of analysts expect another negative result for the current quarter, which would put Germany in recession.


Draghi’s Legacy: The King of Cuts & QE


This month’s meeting and any resulting changes in monetary policy are widely seen as the last hurrah for the ECB president, whose term ends on 31 October. Former IMF President Christine Lagarde is slated to take over the next day.


Draghi is set to chair his final governing council meeting on 24 October, but by then the ECB is expected to have already enacted its latest monetary stimulus programme.


The Italian, who took the helm in the throes of the Eurozone debt crisis, is probably disappointed at how it has all worked out. Earlier this year, the ECB looked poised to raise rates as inflation and economic growth were said to be on track to meet the bank’s targets.


But regional and global uncertainty tied to Brexit, the Sino-US trade war, and tensions in the Middle East have undermined confidence, and consumer prices and economic output in the Eurozone are faltering.


Now it appears the ECB is in retreat, ready to backtrack to quantitative easing and increasingly negative interest rates in an effort to boost both inflation and growth.


The last time the bank raised rates was July 2011, near the end of the term of Draghi’s predecessor, Jean-Claude Trichet.


Draghi’s first press conference as president in November of that year was used to explain across-the-board rate cuts. Interest rates continued downward until March 2016. The ECB has held them there ever since.


The bank also instituted and expanded its massive—and oft controversial—EUR 2.6 bln QE programme on his watch.


-- Eric Culp

Twiter: @EricCulpLS


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