The European Central Bank is set to leave its policy unchanged and publish new forecasts in its meeting on Thursday at 12:45 GMT and as we get closer to the release time, here are the forecasts by the economists and researchers of 14 major banks.
The meeting comes as rising yields are threatening the recovery. According to FXStreet’s Analyst Yohay Elam, the bank’s response to this development is critical to the euro – with bulls urging money printing, and the sooner, the better.
“We expect the ECB will signal its determination to deploy all its firepower to underpin the fragile recovery outlook and counter an unwelcome rise in yields. We, therefore, do not rule out some adjustments to policy guidance. The PEPP, TLTRO III and forward guidance have been the ECB’s main pandemic-fighting tools, and we expect it will turn to these first to underwrite favourable financing conditions. In addition, it is possible that the ECB could ease the criteria around TLTRO III, or enhance its attractiveness, by cutting the interest rate on TLTRO borrowings (currently -1.0 to -0.5%). We are less convinced that the ECB will cut the main deposit rate (-0.5%).”
“We do not expect new policy decisions, but a reiteration of all options on the table while ensuring easy financing conditions. We lean towards the ECB concluding a continuation to monitor and remain short of concluding an unwarranted tightening. We do not expect talking is enough to contain rates, but action is needed. We therefore see upside risks during the press conference to rates. Should the ECB choose to pursue a more dovish stance, we would expect relative rates to become a further drag on EUR/USD. If not, we see EUR/USD as little changed on the day. We expect ECB to repeat the cautiously optimistic tune regarding the economic outlook of the euro area, with minor revisions to its staff projections (slightly lower growth and higher inflation this year). We expect Lagarde to reiterate that the ECB will look through the base effects-driven inflation near-term.”
“More verbal interventions will be ahead next week, but the ECB is not about to introduce concrete yield or spread targets. The ECB is unlikely to be willing to increase the pace of PEPP buying dramatically, and long yields have more upside potential left later this year, as economies reopen and the rebound gathers pace. Both staff growth and inflation forecasts to be revised up, but mainly for the shorter-term.”
“We expect the deposit rate unchanged at -0.50%, APP steady at €20 B/month and the PEPP envelope unchanged at €1,850 B. The ECB may, however, increase its use of the PEPP envelope in the near-term. Ms. Lagarde could officially flag this at the press conference to strengthen verbal guidance.”
“We expect the ECB to nudge up its forecast for inflation in 2021 and nudge down its forecast for GDP growth, but stress that inflation is still likely to fall short of the near -2% target over the medium-term. With no prospect of any change to its policy settings, the focus will be on the Bank’s efforts to explain how and when it would step up bond purchases in response to rising bond yields. On balance, we think the upshot will be higher purchases and slightly lower yields in the coming weeks.”
“The key focus for markets will be how hard the ECB pushes back on the recent rise in yields. While we think that the overall financing conditions ‘compass’ clearly points to a tightening of financial conditions, we’re also sceptical that the ECB is willing to do enough to actually keep a lid on yields.”
“The focus will be all about whether the council feel that the recent rise in bond yields is proportional to the improving global economic prospects or an unwelcoming tightening of financial conditions. Our economists expect them to emphasise their commitment to preserving favourable financing conditions, which encompasses sovereign yields, and its willingness to use the PEPP’s capacity and flexibility.”
“At the last meeting on January 21, the bank sounded a bit more upbeat and that will have to be adjusted this week. Lagarde admitted at the last meeting, that more robust discussions are likely to come at this meeting and that has certainly come to pass. Official comments over the past couple of weeks have been at two ends of the spectrum and reflect ongoing dissension over what to do about rising yields. Given the wide range of views on the need to take action, the bank will do what it usually does under these circumstances and that is….nothing. We think it will take much more market pressure to get the ECB to pivot towards adding more stimulus.”
“Rising yields have also put pressure on the ECB to act, or at least responding with a clear message. However, we don’t think the situation is so critical that the ECB would expand the QE considerably now, which takes full control of the German curve requires. A discussion about yield curve control is likely to take place, but we sense that the ECB’s inaction could disappoint the market.”
“Rising bond yields on the back of higher inflation have increased pressure on the ECB to better explain its current reaction function. This week’s meeting should bring some clarity but no new action. Higher bond yields are warranted this year.”
“We think the disagreement within Council between those who believe the monetary policy to still be effective (albeit in combination with fiscal policy) and those who do not (and have in effect given up on raising inflation back to the objectives) would make a compromise and clarification of policy, harder to reach. Ideally, the governing council should restore credibility by providing an explicit indication of what yield levels it wishes to protect. But given the disagreements, we deem this unlikely at this meeting. Focus on staff projections – the conclusion is likely to be that the output gap remains large and that inflation remains too far from target to allow any tightening in financial conditions.”
“The only reason we see for European rates selling-off is the inability of the ECB to stop them from following the global trend. It is therefore important for the ECB this week to push against the market and re-establish its credibility. A strong message from Lagarde, particularly in light of the ECB’s new commitment to keep monetary conditions supportive, ideally backed by some insights on the direction of the Strategy Review, is what markets would like to hear. If the ECB raises to the challenge, the market should start pricing diverging monetary policies and EUR/USD should finally start weakening.”
“The ECB is set to take a conservative stance simply recommitting to maintaining supportive financial conditions without adding anything more specific and thereby keeping its options open going forward. And the news on its net PEPP purchases conducted last week released so far this week supported such an assumption of conservatism, with the total amount up only modestly. Still, despite this, we see a glimmer of hope that the ECB decides to use this meeting as an opportunity to create some genuine rates divergence between euro area rates and US ones, and by extension weaken the EUR further too.”
“Our view remains for the ECB to stick to its recent rhetoric on the PEPP, and when overlaid with a still supported risk sentiment, may see the EUR/USD stay supported until the next directional cue presents itself.”