ECB preview: Trying not to get lost in transition – ING

According to Carsten Brzeski, chief economist at ING, the ECB in its meeting next week will have to balance between pre-emptive action, which could be perceived as panic, and a relaxed wait-and-see attitude, which could be perceived as complacency.

Key Quotes

“The latest ECB staff projection are very likely to show a downward revision of 2019 GDP growth (1.7% in the December projections). However, any revision which does not go lower than the current consensus of 1.4% is simply proof of the ECB’s sense of reality and no reason to panic. Any significant downward revisions to the ECB’s 2020 and 2021 GDP growth forecasts (1.7% and 1.5% in December) would be a much more alarming signal, particularly as this time around any changes to the forecasts would be mainly driven by changes in the fundamental assessment of the economy and not by revisions to the technical assumptions.”

“Compared with the December projections, there should be no new impulse from oil prices. The effective exchange rate and bond yields are somewhat lower but not low enough to push growth and inflation forecasts higher. This, in our view, also means that there will be hardly any changes to the ECB’s staff projections for inflation (1.6%, 1.7% and 1.8% for the period 2019-2021 in the December projections).”

“In this situation of increased uncertainties, a normal ECB reaction would be to sound dovish, stay on high-alert and tackle the situation with words not action. However, recent comments by several ECB officials have given rise to speculation about changes in the forward guidance on interest rates and the announcement of new Targeted Longer-Term Refinancing Operations (TLTRO) In our view, the discussion on these issues is ongoing but will not be concluded next week.”

“We expect the ECB to announce next week that the Governing Council asked the relevant committees to look into options on how to deal with liquidity bottlenecks and bank profitability. The April meeting will then be the meeting where the real ECB action is. This, however, does not mean that next week’s meeting will be dull. Just getting a glimpse of an interesting and probably controversial discussion behind closed doors can be thrilling.”