ECB: More in March, but not “more of the same”

Gilles Moec and Ruben Segura-Cayuela Europe economists at Bank of America Merrill Lynch analyse the implications of the latest ECB governing council meeting. 

After Draghi’s forceful performance today, we bring forward our call for more easing to March. The content of such an additional package has not been agreed at the ECB, and actually not even discussed, but we do not expect more than a 10 bps cut on the deposit rate (while the market is seemingly taking a more aggressive view, at least for later in the year). As we have been arguing since after December 3, any additional stimulus has to focus on QE.

We think that, given by how much the Euro area’s external environment has changed, mere extension – although necessary, since it is going to take more time to bring inflation back to target – cannot suffice. The “new circumstances” call for something more drastic, and our baseline is that the ECB will have to accelerate the pace of buying. The exact quantification and weighing of extension versus expansion will depend on the distance between the ECB’s next batch of forecasts and their target, but as a minimum we expect what we had in mind for December: buying until September 2017 at least, with the monthly pace moving from EUR60 to 70bn.

Indeed, Draghi has flagged the 10 March meeting as the likeliest time for the delivery of another layer of accommodation. We thought it would take longer for the central bank to correct the disappointment from the 3 December package and were expecting the next stimulus to come in Q2 only. We had underestimated the ECB’s capacity to adapt to a rapidly changing environment and to recognize acute additional risks to the inflation trajectory going beyond the mechanical impact of oil prices.

While we thought March was possible, we did not think Draghi today would “nearly pre-commit” once again. What we also find interesting is that this communication line was “unanimously supported” by the council, which suggests that the level of concern across the whole of the Eurosystem is high and that even the hawks are taking a hard look at the dataflow, dissipating at least some of the concerns around Draghi’s leadership within the institution. The ECB today is back ahead of the curve, and so soon after the 3 December miscommunication we think it cannot afford not to effectively act on 10 March. Unless market and economic data turns decidedly brighter very quickly, doing so would be too costly in terms of credibility. In our view, they will have to deliver.

However, while there’s quite clearly a growing consensus within the Council that more needs to be done, it is no less clear that they are far from having made their choice on the instrument mix. We suspect that the ECB cannot stick to “more of the same” and merely extend the purchases by a few months and take the depo rate down by another 10 bps. The toolbox will likely be re-opened wide. That “no technical limits” constrain the ECB stance is an important statement, in our view. The ECB’s staff creativity is going to be tapped in the next few weeks. We can only hope that the communication around the debate on the new package will be clearer than during the run-up to the December meeting.

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