ECB To Refrain From Sending Any New Signal On Easing

The Draghi show is back and this time with new forecasts. Here is the preview from Danske:

Here is their view, courtesy of eFXnews:

We expect the ECB to maintain its patient stance at the meeting this week and not send any new signals about more easing. An important argument for the ECB to remain patient is that financing conditions have improved following the easing measures announced at the beginning of March. The latest easing of financing conditions is seen in lower real swap rates due to higher near-term market-based inflation expectations.

The minutes from the latest ECB meeting in April clearly confirmed that the ECB is in implementation mode. It stated that patience was needed for the measures to fully unfold and ‘focus of attention had very much shifted to the implementation details of both the corporate bond purchases and the TLTRO-II’. Importantly, the ECB argues that it is adding additional accommodation in June, due to the first TLTRO II auction and the beginning of purchases of corporate bonds.

The ECB will publish updated growth and inflation forecasts at the meeting this week. We look for an upward revision to the ECB’s projection for headline inflation in 2016-17 due to the higher oil and food prices, but the core inflation forecast will in our view be revised lower over the entire forecast horizon. The ECB argues that core inflation will rise as the labour market improves, but we believe wage pressure will stay modest for some time due to labour market slack, while the stronger effective euro will also be a headwind.

Notably, the ECB might revise its 2018 inflation forecast lower. This should follow as the forward oil price has increased more in 2016 and 2017 than in 2018, implying the inflation rate for energy prices is likely to be lower in 2018. A lower inflation forecast at the end of the forecast horizon will not be welcomed at the ECB, but we do not expect it to be enough to trigger a more dovish stance as the ECB awaits the impact of the deliver easing.