ECB meeting: markets expect “messaging rather than action”

Euro sign1The European Central Bank (ECB) is due to meet today, but while investors and markets typically await the outcome with a degree of trepidation, most expect an affirmation of previous policy decisions.

Few expect new policy initiatives to emanate from the meeting, given the major changes instituted last month, including cutting interest rates to zero, and including corporate bonds in the ECB’s asset purchasing programme.

“The messaging rather than action will be the key takeaways for investors and markets from the ECB meeting,” says Salman Ahmed, chief global strategist at Lombard Odier Investment Managers.

“At this meeting it will be imperative to understand whether there is more distance in the moves to pull back from even deeper negative interest rates.”

Andrew Bosomworth, head of Pimco’s portfolio management division in Germany, says Draghi’s speech today will likely focus on the general macro/monetary outlook, and seek to remind that rates and asset purchases remain the key elements of the toolkit.

“We expect him to give prepared answers to questions on the impact of negative rates on bank profitability and Brexit,” he says.

Given the various measures employed to boost Eurozone economic activity and inflation since 2010 have seemingly failed, some economists have even called for the ECB to resort to a ‘helicopter money’ policy – figuratively dumping cash on consumers to get people spending again.

However, Bosomworth thinks the ECB will not treat ‘helicopter money’ as a serious policy alternative any time soon. He believes a further rate cut (to -0.5%) and expanded QE are more likely approaches.

Ahmed contests the idea that the ECB’s measures have been unsuccessful. While inflation expectations remain low, they have stabilised, and financial conditions have eased significantly, reducing the risk of an imminent recession.

Looking forward, the general mood is that the ECB will proceed on autopilot over the next quarter, barring an unforeseen negative shock. Bosomworth thinks there’s a 50:50 chance of additional easing come late 2016/early 2017.

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