Or take other measures?
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Draghi and the rest of the bank’s governing council are widely expected to leave the bank’s key interest rate unchanged at -0.4%, but many in the markets are expecting Draghi to signal an extension of its horizon for quantitative easing beyond the now scheduled end in March 2017. “The bank does not mind holding back with respect to (using) more aggressive measures, but the (bigger) question is how long they can afford to wait given that they are very late in the game of QE”, said ThinkMarkets analyst Naeem Aslam.
The baseline scenario is subject to downside risks, and risks to the outlook of growth have tilted to the downside.
Nevertheless, sterling has rebounded against the dollar since hitting a three-decade low in July, with speculators trimming record high bets against it and sentiment bolstered by the recent slew of better-than-expected activity data. A QE extension could be accompanied by changes to the purchase restrictions but we do not expect this to be announced in September.
Editor’s note: ETF investors looking for investment-grade corporate bond exposure should consider the iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSE:LQD) (Expense Ratio: 0.15%, $32.61B in assets) and the Vanguard Short-Term Corporate Bond ETF (NASDAQ:VCSH) (Expense Ratio: 0.10%, $14.14B in assets). On the growth front, some modest Brexit-induced downward revisions are likely.
The ECB remains downbeat on economic growth prospects for the euro zone. Relative to our expectations for the Staff Projections (and consensus expectations, according to Bloomberg), we maintain our view that the incoming data will disappoint in the months ahead.
It would be a big surprise if that single data point from Germany prompted the European Central Bank governing council to move, said Unicredit economist Marco Valli, noting that industrial production is “one of the most volatile indicators”. But he added that overall rates must remain low to allow room for Eurozone recovery from the impact of the 2008 global financial crisis. This yellow metal remains extremely sensitive to U.S. rate hike speculations and may be poised for further gains as optimism wanes over the Fed taking action anytime soon.
However, for now, we expect it to keep its powder dry.
We had for some time been calling for an extension to the deadline for QE to be announced at the September meeting but our sense now is that the European Central Bank may well delay that announcement until the October meeting or possibly the December meeting.
And on Wednesday, official data showed that industrial production in the EU’s economic powerhouse Germany had undergone a surprisingly sharp contraction in July.
The ECB has seen its stock of eurozone assets pass the €1 trillion mark, a remarkable milestone (couldn’t it have just bought Greece?), although the real total probably nears €1.4 trillion once Greek bonds are thrown into the mix.
Such criticisms “would prevent the European Central Bank from cutting rates further”, said ING’s Brzeski.
ECB President Draghi confirmed that monetary policy was on hold for now, although he insisted that the bank would take additional action if required.
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