• Unanimous expectations look for the ECB to leave its three key rates unchanged
• Not much in the way of fireworks expected given last month’s policy adjustments
• Draghi likely to be mindful of trade tensions and grilled on timing of rate lift-off  

BACKGROUND

PREVIOUS MEETING: Last time around, the ECB announced a reduction in monthly sovereign bond purchases to EUR 15bln/month, through the end of 2018 when it will end (current EUR 30bln/month programme ends in September 2018). Additionally, the Bank stated that “interest rates will remain at present levels through the summer of 2019, and in any case, for as long as necessary”. Staff economic projections saw 2018 and 2019 inflation forecasts both raised to 1.7% from 1.4% and 2018 GDP cut to 2.1% from 2.4%.

ECB MINUTES: The account from the latest meeting revealed that policymakers saw progress towards a sustained adjustment of the inflation path and confidence that adjustments would continue. The minutes added that the open ended character of interest rate guidance should be emphasized and that given the uncertainty, it is prudent to leave the end of QE conditional on incoming data.

SOURCE REPORTS: In the immediate aftermath of the most recent press conference, sources report suggested that policymakers were split over the wording of the stimulus unwind and future rate hikes. Some wanted to keep the door more open for an extension of QE, and others wanted to signal a possible rate hike in the middle of 2019. Later sources reported that the "unwinding ECB accommodation is a risk" and that "protectionism will have a larger effect" than anticipated. Later insights suggested that Draghi is said to have warned Eurozone leaders that countries are facing lower confidence and that EU trade tensions will have a larger impact. Recent reports have focused on the timing of the ECB’s rate lift-off with sources suggesting that policymakers are split on the timing of the first rate hike, and the meaning of "through the summer", some see the hike only in Autumn 2019, whilst some see as early as July. Finally, sources also suggested the ECB are considering buying bonds with longer maturities as of next year in order to keep duration at the same level.

ECB RHETORIC: Similar to the tone of recent source reports, commentary since the previous meeting by central bankers has largely been centred around the Bank’s guidance on rates. Vasilauskas stated that rate changes can be expected towards Autumn next year, with Liikanen stating that the ECB can keep their rates on hold after summer 2019 if needed and Nowotny echoed this sentiment by suggesting that he expects the bank to raise rate after summer 2019. However, comments from ECB’s Villeroy appeared to be slightly at odds with the central bank’s guidance by suggesting that a first rate hike could come ‘in summer 2019’. Villeroy did later appear to fall back in line with the broader consensus at the ECB by stating that ‘the first rate hike may take place at the earliest "through the summer " of 2019 depending on the inflation outlook’.

DATA: On the inflation front, policymakers will have been pleased by the most recent Y/Y EZ CPI reading rising to 2.0% from 1.9% with SEB largely expecting inflation to hover around these levels for the remainder of the year. However, concern was raised after the super-core metric slipped to a lacklustre 0.9% from 1.1%. From a growth perspective, the first print of Q2 GDP isn’t due for release until 31st July but analysts at Nomura track growth at 0.4% and suggest the ECB’s forecast of 0.5% Q/Q could be too high. In terms of recent survey data, Eurozone flash PMIs this week saw the composite reading slip to a 2-month low (54.3 vs. Prev. 54.9) with Markit noting that the “eurozone economy lost momentum again at the start of the third quarter after a brief rebound in June”. On the wage front, Goldman Sachs highlight there’s been little in the way of data ahead of the July meeting.

CURRENT ECB FORWARD GUIDANCE (INTRODUCTORY STATEMENT)

RATES: We expect them to remain at their present levels at least through the summer of 2019 and in any case for as long as necessary to ensure that the evolution of inflation remains aligned with our current expectations of a sustained adjustment path. (14 Jun)

ASSET PURCHASES: We will continue to make net purchases under the APP at the current monthly pace of €30 billion until the end of September 2018. We anticipate that, after September 2018, subject to incoming data confirming our medium-term inflation outlook, we will reduce the monthly pace of the net asset purchases to €15 billion until the end of December 2018 and then end net purchases. (14 Jun)

GROWTH: The risks surrounding the euro area growth outlook remain broadly balanced. Nevertheless, uncertainties related to global factors, including the threat of increased protectionism, have become more prominent. Moreover, the risk of persistent heightened financial market volatility warrants monitoring. (14 Jun)

INFLATION: Today’s monetary policy decisions maintain the current ample degree of monetary accommodation that will ensure the continued sustained convergence of inflation towards levels that are below, but close to, 2% over the medium term. Significant monetary policy stimulus is still needed to support the further build-up of domestic price pressures and headline inflation developments over the medium term. This support will continue to be provided by the net asset purchases until the end of the year, by the sizeable stock of acquired assets and the associated reinvestments, and by our enhanced forward guidance on the key ECB interest rates. (14 Jun)

POTENTIAL ADJUSTMENTS TO ECB FORWARD GUIDANCE (INTRODUCTORY STATEMENT)

RATES: No changes expected given that the guidance was altered at the previous meeting and there has been little in the way to alter their expectations for rate lift-off, particularly given that the forecast is towards the back-end of next year. Changes on this front are not expected until nearer the time of the first rate hike (giving markets a green light/delaying lift-off); a view backed by Oxford Economics.

ASSET PURCHASES: Similar to rate guidance, given that changes were made on this front at the prior meeting and there has been little reason for the ECB to make adjustments on curtailing bond purchases, this part of the statement is expected to remain the same. At this stage, only a major imminent economic crisis could deter the ECB from carrying on with their planned unwind.

GROWTH: Goldman Sachs look for the ECB to maintain that risks to the growth outlook are broadly balanced. GS suggest that although risks have increased on the trade front, this has been accompanied by a slight decline in the risks surrounding Italian politics. That said, risks surrounding trade will likely be a key source of focus at the Press conference.

INFLATION: As discussed above, despite headline CPI reaching the 2% target, concerns continue to mount regarding core metrics and have emphasised the task ahead for the bank in achieving a sustained pick-up in inflation. That said, ING look for the ECB to stick to its June assessment and strike an overall relatively upbeat tone.

WHAT TO WATCH OUT FOR

Given that the ECB appear to be on auto-pilot mode having announced a curtailing in stimulus and alteration to their forward guidance at their previous meeting, this week’s press conference is set to offer little in the way of fireworks.

That said, markets will be sensitive to any comments regarding the risks facing the Eurozone’s economic recovery posed by ongoing trade tensions. Since the previous meeting, global trade tensions have ratcheted up with the US imposing tariffs on USD 34bln of Chinese goods (USD 16bln more to come) and with President Trump threatening to slap tariffs on USD 505bln of Chinese imports. The Eurozone economy hasn’t been immune to Trump’s “Make America Great Campaign” and with Trump threatening the EU with large tariffs on imported car and auto parts this has subsequently prompted a visit by European Commission Chief Juncker to diffuse the situation.

In terms of what this means for Draghi et al, trade tensions have been flagged as the most noteworthy threat to the Eurozone economy and thus this could prompt Draghi at some stage to address the matter head-on. However, with the situation continuing to develop on a near daily-basis Draghi will most likely opt to state that the Bank are mindful of developments on the trade front rather than rescaling market expectations for the Eurozone’s growth prospects. Furthermore, being overtly concerned about trade tensions at this stage would likely spook markets given last month’s decision to curtail bond purchases from September and thus, addressing the matter at a later date could be a more prudent option.

Elsewhere, journalists will probably try and once again grill the President on when exactly to expect a rate hike by the ECB given the adjustment of forward guidance last month and subsequent source reports that have questioned the timing of such a hike. However, it is highly unlikely that Draghi will indulge such speculation given the potential looming economic risks and thus will wish to preserve a degree of flexibility. As such, expect the central bank head to adopt his usual tactic of referring journalists to the ECB’s introductory statement.

MARKET REACTION:

Given all the above, any market reaction this time around is likely to be a relatively contained affair with Draghi unlikely to wish to unsettle markets by casting doubts over the Eurozone’s economic recovery. In the event that Draghi is overtly cautious about the fallout from recent trade tensions, EUR could be weighed upon with upside in fixed income markets and equities on the prospects of a slower pace of policy unwinding by the Bank. Market pricing could shift around if (again unlikely) Draghi gives a clearer indication of precisely when markets should expect a rate hike (currently nearly 10bps of hikes priced in by October 2019). That said, these scenarios are unlikely and subsequently TD Securities prefer adopting a neutral view on the front-end of the curve heading into the meeting and look for a muted FX reaction.