BofAML_Euro Area Economic Watch: ECB preview: next week and beyond

Redacción - Viernes, 01 de Septiembre

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Euro Area Economic Watch: ECB preview: next week and beyond •  Our ECB call remains unchanged: emphasis of FX risks and hints at committees being tasked, but no QE disclosure next week.
•   We expect a 6m QE extension at EUR 40bn/month announced in Oct. Full exit plan unlikely to be unveiled to keep optionality.
•   The new set of forecasts may be difficult to communicate. We discuss the EUR effect and signals from our MCI index.

Strong case for waiting

We have been arguing for quite some time now that the ECB will choose not to disclose at its September meeting the fate of QE in 2018. Indeed, we think that the tightening in monetary conditions driven by the currency appreciation (see Box 1) makes the Governing Council more sensitive than usual to market perceptions of the policy differential across the Atlantic.

Until the beginning of the summer, the ECB could have developed a staged approach to exiting QE under cover of the Fed's adherence to a predictable path of normalisation. Since then stubbornly low US inflation - and probably less explicitly the complexities of the political situation - has seemingly eroded the Fed's confidence. It's actually roughly when the ECB got ready to ever-so-slightly toughen up its communication at Sintra that the Fed's signals became harder to read.

With the euro now having broken the 1.20 USD threshold for the first time since the start of QE (albeit only for a day), we think the ECB will avoid to pre-commit to any path for QE next year before hearing the FOMC's views. In particular if the Fed chooses to offset the beginning of its balance sheet offloading with a downward revision in the dots, additional pressure on the euro's exchange rate would in our view warrant a recalibration of the ECB's own policy.

In our view, it is only if the Governing Council has already decided to opt for a dovish surprise - to be clear a significantly slower pace of QE adjustment that the market currently expects - that it could take the risk of disclosing its intentions already. Indeed, this could be seen as providing enough insurance against whatever dovish surprise the Fed in turn could come up with. Our impression though is that the council has not yet reached "maturation point" (the Minutes confirmed that they had no formal discussion of the programme's future) and would rather retain maximum optionality.

Draghi will have to say something though

At the July meeting Draghi managed to sound dovish without elaborating much. With a new set of forecasts (see Box 2 for our detailed view on the September forecasts) and the new market focus on FX we think the ECB will have to be more explicit.

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