ECB: Talking unlikely to be enough to contain rates, but action is needed – Danske Bank

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The European Central Bank will have its policy meeting next Thursday. Analysts at Danske Bank consider the meeting will focus on the financing conditions and the PEPP implementation. They do not expect new policy decisions, but a reiteration of all options on the table while ensuring easy financing conditions.

Key Quotes: 

“Themain unknown is whether ECB will explicitly coin the recent rise in both nominal and real yields as an unwarranted tightening of financing conditions or fall short of reaching that conclusion and decide ‘only’ monitor the evolution of yields.”

“We lean towards ECB concluding a continuation to monitor and remain short of conclude an unwarranted tightening. This may come at a later stage if conditions worsen ‘enough’.”

“We do not expect talking is enough to contain rates, but action is needed. We therefore see upside risks during the press conference to rates. Should ECB choose to pursue a more dovish stance, we would expect relative rates to become a further drag on EUR/USD. This would be in line with a mild easing of financial conditions while the European recovery remains weak. If not, we see EUR/USD as little changed on the day. Our long-term forecast remains 1.16 on 12M.”

“We expect ECB to repeat the cautiously optimistic tune regarding the economic outlook of the euro area, with minor revisions to its staff projections (slightly lower growth and higher inflation this year). We expect Lagarde to reiterate that ECB will look through the base effects driven inflation near term.”

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