BofAML: Previa del BCE: ahora las palabras, después la acción (Euro Area Watch)

Redacción - Jueves, 27 de Agosto

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Euro Area Watch: ECB preview : words now, but action to follow •  Avoiding more euro re-appreciation is the short run priority - weak euro is QE's most tangible result
•   Talking dovish should be the ECB's first port of call next week, it is hard to get more in September beyond some minor tweaks
•   The ensuing revision in the ECB's inflation trajectory will force the Governing Council hand on beefing up QE by year end

Bottom line: avoiding more euro re-appreciation is the short run priority - weak euro is QE's most tangible result. "Talking dovish", i.e. unambiguously recognizing the risks to their outlook and underlining the possibility to do more, should be the ECB's first port of call for next week, while the resilience in the real economy data flow and uncertainty over the Fed stance makes it hard to get into action in September already, beyond possibly some minor tweaks to asset eligibility as a sign of good will. In the medium run though, the negative risk on consumer prices from the China-related turmoil matters more than the adverse shock on growth. The ensuing revision in the ECB's inflation trajectory - with Praet already acknowledging downside risks there - will force the Governing Council hand on beefing up QE by year end, in line of our long held view that the inflation outlook would force the ECB into more for longer. In our view, announcing that QE will continue beyond September 2016 would be a powerful form of forward guidance, allowing to maintain a suitable "policy gap" with the Fed.

Events colliding with the ECB's yearning for plain sailing

In an interview with Boersen Zeitung last week, ECB board member Benoit Coeuré stated that "we do not wake up every morning and look at the economic indicators in order to decide whether to raise or lower interest rates or whether to stop or expand QE", conveying a sense that QE should be allowed time to work through the economy and is not designed to "micro manage" the cycle. The decision to reduce the frequency of the Governing Council meetings - announced in July 2014 - also signalled the ECB's willingness to wean the market off speculating on how the central bank would react to short term "noise". Finally, we also think that with QE the central bank as it was designed in January has found a delicate internal compromise, and that the bar for any material tweaking is quite high.

Still, the ECB has been "asymmetric" for quite some months, firmly dismissing any tapering of the programme before September 2016 but open to more action. Draghi iterated in July that it was ready to do more "if any factor were to lead to an unwarranted tightening in monetary conditions or if the outlook for price stability were to materially change". The issue then is whether the Chinese-related turmoil would qualify for such "material change". We think there is enough for more dovish talking, but not - yet - for action, even if the latest developments sit well with our view that the ECB, by year-end, will have to make QE continuing after September 2016 a baseline and not a possibility, on the back of a deteriorating inflation outlook.

 

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