Thursday, 09 March 2017

ECB Meeting

The main, indeed almost the only, event of the day is the ECB Council meeting, and even that is likely to be rather tame. The ECB is unlikely to make any more changes in its policy stance today. Indeed, the market sees slightly less than a 50-50 chance of a rate hike at any time this year, and virtually no chance of another cut.

The ECB has generally maintained an easing bias, which has kept EUR/USD on the downtrend (especially when compared with the Fed’s tightening bias). Given the recent rise in inflation in the Eurozone, we could see a subtle shift in the tone of policy at this meeting, especially if the new staff forecasts are notably better than the previous ones. Yet with the EU’s political calendar just getting under way next week with the elections in the Netherlands and EU bond markets starting to show the strain, probably now isn’t a good time to start roiling the markets.

At most, I could imagine that perhaps they make some adjustment to their forward guidance. The boilerplate statement that they put out after every meeting says, “The Governing Council continues to expect the key ECB interest rates to remain at present or lower levels for an extended period of time…” They could remove the words “or lower” without too much impact on the markets, since nobody really expects them to cut rates further anyway. The statement also says that if the economic outlook becomes less favorable, the ECB “stands ready to increase” its QE program “in terms of size and/or duration.” They could in theory make some changes here, but since they already said they would cut the size of the QE purchases beginning next month, that would seem to be unnecessary.

While I don’t think the meeting will result in any change in policy, I think it could result in an upgrading of the economic forecasts, particularly for inflation. And as we saw yesterday with the improved forecasts that accompanied the UK Budget, that has the potential to cause the currency to strengthen as well. So if anything I could see the meeting pushing EUR higher.


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