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LONDON (MNI) - The European Central Bank is unlikely to make any major
decisions on the option to renew its asset purchase programme before September,
while divisions are opening up between this and other potential easing steps
including forward guidance, the deepening of negative rates and any associated
tiering of the deposit rate, Eurosystem sources have indicated to MNI.
Several sources raised the prospect of the Governing Council once again
amending its forward guidance, possibly as soon as its 25 July meeting or
shortly thereafter. While views differed on how the language might be tweaked
and when, it was noted that ECB policymakers' minds would be on the distinct
likelihood of a Fed rate cut at the 30-31 July FOMC meeting.
ECB forward guidance could be amended later this month to indicate that
rates will be "unchanged or lower" until at least the middle of next year, one
official suggested, following hard on the heels of the June meeting decision to
indicate that key interest rates will "remain at their present levels at least
through the first half of 2020."
"The fact that we just recently changed (forward guidance) delaying a rate
hike does not mean we can't and won't change it again over the coming months,"
said another source, but added: "I doubt there would be any clear announcement
in the July or September meetings."
This source saw "a few positive signs pointing to a slight recovery in the
second half of this year which we must wait to analyze properly," echoing
another's view that apparent improvements in the status of trade talks between
China and the US "have probably bought a bit of time."
One source suggested an additional emphasis on the symmetry of the ECB's
medium-term inflation target - dusted off by President Mario Draghi at last
month's ECB Forum in Sintra - could be used to signal further easing, either in
the text of the Governing Council's decision or again by Draghi the press
conference afterwards. Another source thought that the concept of aiming for
above 2% inflation to compensate for years of undershoot "made no sense at all."
--ALL DRESSED UP
It was apparent from the sources' comments that the ECB's consensual
reaffirmation to 'do whatever it takes' to meet its inflation mandate does not
yet extend to a broad agreement over what policy easing actions to take and when
to combat 'deteriorating economic conditions'.
"There's quite a consensus that the ECB has to be prepared to do whatever
it takes to react to a bad situation, but there is a question mark over what is
really a bad situation," one source said. "It partly depends on incoming data,
but I wouldn't say that we can expect any decision in July or September ... If
by November or December the situation hasn't got much worse, then I still
wouldn't expect anything," leaving it all to Draghi's newly-named successor,
This source said the Governing Council's focus was on the hard data, "but
also an additional worsening of sentiment. One variable under very intense focus
now is trade flows, plus some deterioration in foreign markets - some such
combination - especially if there is a slowdown in China or the U.S., in
combination with, at least, sentiment at home and probably some hard data."
"I think we have time until September,' another official opined. Yet
another thought that while September may be too early to make any major
decisions, the publication that month of the next set of ECB staff macroeconomic
projections for the euro area could influence the timing.
The Governing Council could choose to relaunch QE, trim the deposit rate
and amend forward guidance all at the same time, one source said, noting that
such a bumper easing package could theoretically coincide with the launch of
TLTRO-III in September. Another felt that "the meeting in September will be the
crucial one; October it is too close to the transition to change policy [...] If
we go for asset purchases we could make a general announcement in September and
provide the details later on."
Recalling Draghi's demarche in Sintra, one official said: "It was a dovish
speech but it was not meant as 'we will take action in the next two meetings.
The ECB needs to have new figures - so September is the earliest meeting where
action could be taken."
--QE IN THE QUEUE
"Lower rates are more likely than more QE, which in theory could be
possible, but we're not in a huge crisis," this source continued. "But that
could change if (US President Donald) Trump presses the button and the oil price
"Our conundrum is whether to have low rates for longer, or lower negative
rates," pointed out one of the earlier sources cited. "At this stage, we're
perhaps more in favour of low rates for longer, in which case I expect that the
rate on the marginal lending facility may be kept at current level for a longer
period of time compared to the other rates".
There is currently "not much appetite" for tiering among Governing Council
members, this source claimed. However, another, also cited above, was clear: "My
guess is rate cuts will probably be the first step. That will have to be
accompanied by tiering".
An ECB spokesman declined to comment to MNI on these matters.
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