ECB preview: Proceeding with caution - HSBC

The 8 June ECB meeting should be the most interesting since December, as several Governing Council members have said it will be a point to reassess the appropriate path for monetary policy suggests analysis team at HSBC.  

Key Quotes

“We expect inflation forecasts to be nudged down, growth unchanged  New ECB forecasts will be published.  Although cyclical indicators have strengthened again, we don't expect any changes to the growth forecasts.  However, we do anticipate growth risks will be balanced and no longer skewed to the downside.  A 2% appreciation in the euro and a 7% fall in the oil price compared to the cut-off point for the March forecast means we expect downward revisions to its inflation forecast.”

“Lower inflation should fit with the ECB's concern that a self-sustained return of inflation to target is far from assured.  Wage pressure and core inflation remain subdued. Indeed, the fact that an improved growth outlook has not lifted inflation prospects is now a key part of the ECB's story.”

“No significant change in forward guidance, exit will be gradual Nevertheless, some Governing Council members may want to see a change in the ECB's forward guidance, in light of the cyclical upswing.  For them, credibility is at risk if the ECB's communications appear divorced from the economic data.”

“Our central case is that there will be no significant changes to forward guidance.  Instead, the ECB may simply tell us that it discussed exit strategy and, when the time comes, exit will be gradual and data-dependent.  We also assume that the ECB will continue to argue that the -40bps deposit rate is not adversely affecting the efficacy of monetary policy.”

“If our central case is wrong and there is a change in wording, we think dropping the clause that key policy will remain at present or lower levels "well past" the horizon of net asset purchases would make most sense.  This could increase policy flexibility once QE is fully tapered.”

“The ECB has a track record of tightening too early.  We think it is mindful of this bias and all too aware that central banks globally have been overly optimistic about past inflation dynamics re-asserting themselves.  For these reasons, we expect to adjust its language and policy stance very gradually.”