According to analysts from Danske Bank, the most interesting about Thursday’s European Central Bank meeting will be the growth risk assessment and more hints on liquidity operations. They expect growth risk to be on the downside and no formal announcement of liquidity operations
Key Quotes:
“We expect Mario Draghi to strike a precautionary tone in order not to move markets. Given the current market pricing, we do not expect the precautionary tone to lead to a significant dovish market reaction to the meeting.”
“The hotly debated growth risk assessment is set to take centre stage. At the previous meeting, the ECB coined the growth risk assessment as broadly balanced but moving to the downside. Since then, we have seen a string of disappointing data, which is also visible in the surprise indicator close to the lows reached around the sovereign debt crisis.”
“One could argue that the downside risk assessment has been long overdue looking at both soft and hard indicators.”
“We believe that the broadly balanced risk assessment at the December meeting was needed for the ECB to end net purchases. Furthermore, we note several governing council members have argued for a continuation of the narrative, while others point to the softer data warranting a change to the overall risk assessment. The previous time the ECB changed its risk assessment was in June 2017 (from downside to balanced).”
“We do not change our ECB rate hike call from December 2019. The softer data at the start of the year was already expected, also as activity in China remained weak. Our main argument for expecting a rate hike by the end of the year is due to our expectation that wage growth will translate into underlying inflation towards summer.”
“We acknowledge that our expectations for a December rate hike is not a balanced risk. We see a 10% chance of an earlier than December rate hike, a 60% chance of December 2019 hike and a 30% chance of a later-than-expected rate hike. Given the increased risk of the ECB hiking rates only after December 2019 on the back of a more severe slowdown than first expected.”
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