Daily Insight Three ECB issues to watch
Group Economics Macro & Financial Markets Research Nick Kounis & Maritza Cabezas +31 20 343 5616
20 October 2015 • • •
We set out three big issues to watch out for in President Draghi’s presser this week… …our base case is that the ECB will expand and extend its QE programme in December China’s third quarter growth better than expected - signs that negative momentum is easing
ECB on hold this week, but action in December We expect the ECB to keep policy on hold this week. The deterioration in the inflation outlook justifies a move already in our view, but Governing Council members have been lining up to say action this week would be premature. Our base case is that the ECB will step up QE at the December meeting, by extending the end date (beyond September 2016) as well as increasing the monthly purchase size (by EUR 20bn).
EUR/USD and oil price verses ECB assumptions USD per barrel
EUR/USD
54 1.16
52 50
1.14
48
1.12
46 1.10
44
Three things to watch Despite the likely lack of action in October, the meeting could
42 1.08 12-Aug 22-Aug 1-Sep 11-Sep 21-Sep 1-Oct 11-Oct 21-Oct
prove to be an interesting one, as we could get a clearer idea of
Oil Brent USD/barrel (lhs)
ECB projection rest 2015
future action. We set out 3 big issues to watch below.
EUR/USD (rhs)
ECB projection rest 2015
Risks to inflation
Source: Thomson Reuters Datastream, ECB staff projections
At the September meeting, the ECB revised down its medium term inflation projection to 1.7%. At the same time, Mr. Draghi noted
China third quarter growth better than expected…
that the risks to that forecast were to the downside given the
China’s Q3 GDP growth was slightly stronger than expected,
developments in the technical assumptions since the cut-off date.
slowing to 6.9% yoy in Q3, down from 7% in both Q1 and Q2. This
This remains the case in our view, with the euro higher than the
suggests that China will on paper be able to meet the 7% growth
ECB expected and oil prices lower (see chart). This means the
target for 2015 announced by China’s authorities. Although the
ECB President should confirm the downside risks. If he does, that
debate over to what extent China’s GDP growth figures are reliable
would be a strong signal that further easing was on the agenda.
is ongoing, other economic data for September show that the third quarter is ending on a more positive note. Indeed, services output
Changes to QE programme
rose to 8.6% in Q3 up from 8.4% in the first half of the year.
If it becomes clear that more action is on the cards, the next big
Meanwhile, despite structural problems in the real estate sector,
issue is exactly what the ECB will do. In September, the Governing
property sales are showing some improvement, growing at 7.5%
Council stressed its ‘willingness and ability to act’ noting that ‘the
yoy in the year to September up from 7.2% in the first eight
asset purchase programme provides sufficient flexibility in terms of
months. On top of this broad credit growth accelerated to a nine-
adjusting the size, composition and duration of the programme’. It
month high in September. This could raise concerns of the
will be interesting to see whether the President gives any more
trajectory of China’s debt levels, but in the short run it’s supportive
specific signals about how it could adjust the QE programme.
for economic activity. Finally, retail sales growth also edged up.
Deposit rate cut
…with signs negative momentum is easing
Up now the ECB has given the guidance that its policy rates had
There remain, however, some major weak spots, including the
reached the lower bound, and would therefore not be cut further.
ongoing significant slowdown in industry and investment. However,
Any failure to repeat this line when questioned in the press
in terms of the whole economy, there are signs that the negative
conference, could be a sign that a policy rate cut is back on the
momentum is easing. With stronger fiscal spending in the pipeline
table as an option to ease policy further, either on its own or
and credit growth accelerating that process should continue. We
together with a QE extension. A deposit rate cut could be
think the authorities will do what it takes going forward to keep the
particularly effective in pushing down the euro.
slowdown gradual. Our GDP growth forecast for 2016 is 6.5%.