ECB could already act in July

According to Nick Kounis, head of Financial Markets Research at ABN AMRO, there is a possibility of a cut in policy rates already at this week’s ECB meeting.

Key Quotes

“The macroeconomic conditions for easing set out by the ECB do seem to have already been met. In addition, Chief Economist Philip Lane outlined that below-target inflation outcomes meant that the ECB needed to prove its commitment to price stability by taking relatively earlier action than if inflation outcomes had been closer to target.”

“On the other hand, the ECB has tended to take decisions at meetings when it has updated macro projections and the next update is in September. So although it is a close call, we expect the ECB to stand pat in July, but cut all its main policy rates by 10bp in September.”

“As well as a 10bp rate cut in September, we expect an even stronger signal that the ECB is investigating the design of a new asset purchase programme. By December, we expect the ECB to announce the full modalities of a EUR 630bn QE package, to be implemented for 9-months from January 2020 at a pace of EUR 70bn per month. The second 10bp rate reduction will follow in Q1 of next year. However, recent comments from officials suggest that the balance of risks are towards earlier moves.”

“Most economic data over the last few weeks suggest that downgrades of the ECB’s growth and inflation projections are indeed likely in September. Furthermore, the further decline in market-based indicators of inflation expectations is adding to the concerns of the Governing Council.”

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