Thursday, September 8, 2016
Here's what to expect from the ECB's latest policy meeting
The European Central Bank is back from its summer holidays and will announce its first monetary policy decisions for the eurozone since mid-July on Thursday at 12:45 p.m. BST (7:45 a.m. ET).
The decision will then be followed 45 minutes later by a press conference, in which ECB president Mario Draghi will discuss the bank's monetary policy decisions, and discuss policy going forward.
Draghi and the rest of the bank's governing council are widely expected to leave the bank's key interest rate unchanged at -0.4%, but many in the markets are expecting Draghi to signal an extension of its horizon for quantitative easing beyond the currently scheduled end in March 2017.
Europe is continuing to battle unprecedented low growth and inflation, with nothing the ECB does seeming to have much of a material impact on either of these things. Growth remained subdued at 0.3% in the second quarter of 2016, while inflation hovers just above zero, and has done so for a substantial period of time.
Draghi and other ECB governing council members have repeatedly insisted that the bank still has tools remaining to combat stagnant growth and inflation, but after nearly two years of negative interest rates and unprecedented bond buying, it is increasingly appearing as though the ECB is running out of options.
Commenting on the meeting, Craig Erlam, analyst at FX platform Oanda said in an email (emphasis ours):
"The ECB finds itself between a rock and a hard place at the moment. Growth and inflation continues to elude the euro area and we’re likely to find out today, when the central bank releases its latest economic projections, that Brexit has only made that situation more dire, albeit potentially less so at this stage than many would have thought a couple of months ago.
"The problem is that not only is further action opposed by some of the more hawkish policy makers – most notably Bundesbank Head Jens Weidmann – the ECB is becoming increasingly constrained by the number of assets it can purchase under the rules of the quantitative easing program. Therefore, before any increase in bond buying is announced, it must first alter the eligibility criteria, which is easier said than done. Even without an increase, the rules of the program may have to be altered, something that would require the approval of Germany which is unlikely to come easy."
Markets will be keenly watching for any indication from Draghi about an extension of QE, as well as any hints about whether interest rates could go even lower than they currently are, plumbing further into uncharted territory. However, there are other things to look out from the bank, with Brexit, and the bank's outlook for the future likely to be high on the agenda.
During his press conference, it seems inevitable that Draghi will be asked for his thoughts on the impact of the UK's decision to leave the EU, following a slew of better than expected economic data coming out of the UK, suggesting that the immediate impact of the referendum of has not been quite as bad as many had expected.
In the last week alone, IHS Markit's PMI surveys for all three crucial sectors of the economy — services, manufacturing, and construction — have bounced back from disastrous figures in July.
Manufacturing, for instance, saw its biggest single month jump in history, while services jumped quicker than at any time in 20 years. The construction sector remained in contraction,but it is important to note that the sector was already shrinking even before the Brexit vote.
However, in Europe, there were suggestions in PMI surveys released this month that a 'Brexit impact' may be starting to creep into the eurozone economy.
As well as the economic impact, there's are also political issues within the eurozone and the wider Europe. Fears abound that Brexit will give a boost to parties on the extreme The"contagion risk" from the UK to the rest of the continent is very real. France's Marine Le Pen announced last week that if elected she would hold a referendum on France's membership of the EU. In the Netherlands, Geert Wilders' far-right anti-EU Dutch Freedom Party keeps gaining in popularity as well.
Add to this the upcoming referendum in Italy on senate reforms, which could topple Italy's most stable administration in many years, and it's clear the political risks to Europe are substantial. Draghi will likely be asked how he believes political challenges will hit his plans for the eurozone economy.
Draghi may also cut future forecasts for both growth and inflation, in a sign that Europe really is struggling to find any meaningful expansion, and that the weakness in the continent will continue for a long while. As Mike van Dulken of Accendo Markets noted earlier on Thursday: "Real focus will be on the potential for ECB President Mario Draghi to announce downward revisions to the bank’s growth and inflation forecasts in light of an ever-struggling Eurozone region, especially following those German misses on Factory Orders and Industrial Production."
Financial markets in Europe are looking pretty steady on Thursday morning, given the expected inaction from the ECB in terms of its interest rate decision.
In equities, the Euro Stoxx 600 broad index of the continent's biggest companies has moved just 0.14% as of 9:45 a.m. BST (4:45 a.m. ET). Here's how that looks:
While in the currency markets, the euro has gained just 0.3% on the dollar so far in the day: