ECB Preview: 9 Major Banks expectations from October meet

Today we have an all-important ECB meeting and as we get close to the decision timings, here are the expectations as forecasted by the economists and researchers of 9 major banks for the upcoming meet.

Most of the banks are expecting ECB to announce an extension of QE programme at 12:45pm BST and leave all forward guidance and its reaction function unchanged with tapering well anticipated.

Rabobank

The ECB looks set to announce tapering this week. We believe that QE will be wound down in three steps of EUR 20bn, bringing purchases to zero in 2018H2. A few other scenarios are realistic alternatives, and we expect the market impact to be broadly similar across all options we consider feasible. That said, we admit that our scenario is on the more hawkish side of the tapering spectrum. If the ECB opts for such an exit, this could lead to a negative market reaction in the short-run. However, we would argue that ultimately the flexibility given by this approach could actually help stabilising yields in the long run (and so limit sharp movements).

Nomura

The ECB is widely expected to announce that the monthly pace of asset purchases will be reduced from the beginning of next year. As far as the parameters of the APP are concerned, in our base case we expect monthly purchases to be cut by EUR20bn to EUR40bn per month from January to June 2018. We further expect the forward guidance on interest rates and the APP to remain unchanged. However, the bigger issue here is whether the ECB keeps the programme open-ended or sends a firm signal about ending it. And with no change expected in the forward guidance we are in the former – and thus the more dovish – camp. Preventing a sharp market response that would tighten financial conditions and potentially destabilise economic activity is clearly a key priority for the ECB at present in its wish to see firmer inflation data in the period ahead. 

BBH

It is all about the ECB meeting today.  The market was hoping for more details last month, but Draghi pointed to today.  The broad issue is well known.  While growth has been strong, price pressures are still not, according to the ECB, on a durable path toward its "close but lower than 2%" target.  The ECB judges that substantial additional stimulus is needed. There appears to be a consensus that the ECB extends its purchases through the first nine months of 2018 at a pace half the current size.  That would allow the ECB to nearly exhaust its universe of acceptable assets. The ECB will likely seek to maintain as much flexibility as possible.  It is unlikely to call this tapering as it implies an endpoint, which the central bank does not want to suggest, even if we all know it is there.  The re-scaling of its operations is meant to adjust for the evolving economic and financial conditions.  

Westpac

All eyes remain on the ECB Governing Council as they near the end of their current asset purchase program, which is due to expire in December. At the October meeting, some formal announcement of an extension of the program for 2018 is anticipated. Whether all the detail is made available remains an open question. To our mind, the most logical program structure would be to taper from €60bn to €40bn in the first half of 2018, then to €20bn in the second six months. That would allow a smooth transition to a flat balance sheet come 2019. The alternative would be a circa €30bn pace through the entire year. Either way, some €360bn in additional liquidity would be provided to markets and the economy during 2018. Interest rates will remain unchanged in 2018 and early 2019.

Societe Generale

Today the ECB meeting will be closely watched. We are looking for a nine-month extension of the APP programme starting in January at a monthly pace of €25bn. We expect the ECB to keep the door open to more QE thereafter if needed: the APP programme would continue to be open-ended and data-dependent. Yet, our baseline scenario is that the QE programme will end in September 2018, paving the way to a first rate hike in spring 2019 to put an end to the negative deposit rate.

TDS

We look for the ECB to announce a 12-month extension of QE at €30bn/month with its 12:45pm BST press release and leave all forward guidance and its reaction function unchanged. The 1:30pm introductory statement is likely to be little changed with continued shots at EUR, as any surprises would have come in the earlier press release. In the Q&A, that’s where Draghi can really hammer a dovish message. He can reiterate the commitment to sequencing and the “or beyond if necessary” language on QE, keeping the door wide open to tapering extending into 2019, particularly in the case of tighter financial conditions (i.e. stronger EUR). Draghi can also bring back the “sustained market presence” wording from December 2016 that helped support last year’s dovish taper. He may also draw attention to the growing reinvestment flows, so even post-recalibration, gross QE flows are little changed.

ING

With a strong cyclical upswing underway and an increasing scarcity of bonds to buy, the ECB looks set to finally embark on its long-awaited tapering programme. We think the ECB will first identify a targeted, final, size of the balance sheet before it derives paths towards it. The latest press reports suggest the increase of the balance sheet could be between 200bn and 300bn euros. Well, we think there are three options, but we think the most likely is a 'lower for longer' scenario, where the ECB reduces monthly purchases to 25bn euros and extends the programme to the end of 2018. That looks set to be announced this month which, together with a clear reminder that the first rate hike won't come until well after the end of QE, should help anchor interest rate expectations and immunise against further exchange rate fluctuations. Today’s ECB meeting should finally provide the first details of the dovish tapering plans, ideally with as little noise as possible.

BNPP

The ECB takes centre stage today and is widely expected to announce plans for asset purchases beyond December; our economists forecast a commitment to purchase EUR 30bn per month (down from EUR 60bn) for a period of six months. With recent reports suggesting that a 9-month extension was under discussion, a result in line with our expectation might be viewed as marginally hawkish. We see limited scope for the EUR to benefit from the announcement given the extent to which tapering of purchases has already been priced in.

Danske Bank

In line with recent ECB communication which points to a preference for a ‘lower for longer’ scenario, we change our call and now expect the ECB to announce a QE extension by nine months at a pace of EUR30bn at the meeting on 26 October. After that, we expect the ECB to end its QE purchases in Q4 18. In our view, a larger scaling down of purchases would ease future QE implementation and higher reinvestment volumes of maturing bonds will also add to the monthly QE flows in 2018. The appreciation pace of the effective euro has slowed since September and is hence less of a headache for the ECB now. Apart from a scaling down of QE purchases, we expect the ECB to make no changes to its forward guidance at the upcoming meeting. We also believe it will retain the option to extend the QE horizon or scale up purchases again if the inflation outlook deteriorates. Markets currently expect the first hike only in mid-2019, which we think is fair.