ECB January Meeting Preview: No Fireworks; Strategic Review

22 January, 2020

Policy Announcement: Thursday Jan 23^rd, 12:45 BST / 07:45 ET; Press Conf: 13:30 BST / 08:30 ET Current Rates: Deposit -0.50%, Main Refinancing 0.00%, Marginal Lending Facility 0.25%. In Brief:

Analysts unanimously expect no change in policy; markets pricing no rate changes this year
Forward guidance expected to be left unchanged, retaining the easing bias
No new staff forecasts this meeting; next update due in March
Focus expected on the launch of the strategic review (expected to be completed by year end)
This is Lagarde’s 2^nd meeting and 1^st meeting for new Exec Board members Schnabel & Panetta
Economic data has broadly continued to stabilize
“Downside risk” wording may be watered down further from “somewhat less pronounced” but likely not changed to “broadly balanced” yet

Overview: Analysts and trading desks are not expecting the January ECB meeting to be an especially exciting one with most expecting the launch of the strategy review to be the focus. Economists unanimously expect no change in policy tools with all 61 surveyed by Bloomberg expecting no change in key rates and the asset purchase programme widely expected to be left in place. Indeed, many analysts expect actual policy tools to be left unchanged for some time, leaving the ECB to focus on the strategy review. There is still some divergence among analysts about whether issuer limits will need to be raised in the context of the current QE programme – many think changes, or at least discussions about changes, will be needed but some incl Nordea think the status quo will suffice. Finally, note there are still five remaining TLTRO-III auctions scheduled. We do not get an update on the ECB staff forecasts this month. The next quarterly update to these will be in March. Instead on Friday we will see the Survey of Professional Forecasts (SPF) released on Friday. Changes to ECB Board January has seen the completion of the transition from the old guard to the new guard of the ECB Executive board. The January meeting will be only the 2nd meeting for President Lagarde and the first meeting for Isabel Schnabel and Fabio Panetta. Generally speaking, many think these changes appear to suggest less division on the Board than we saw previously. The market’s early impression of Lagarde has been as more of a moderator or consensus builder, helping to heal some prior damage done by dissension within the ranks. The market will continue to look to evaluate her communication style heading into the press conference. Isabel Schnabel replaced Sabine Lautenschläger on the ECB board, is in charge of the ECB’s market operations, and is so far being read as more centrist than her predecessor who was a noted hawk on the Council. Our own hawk/dove analysis currently assesses her at the hawkish end of the centrist members. Schnabel was opposed to the September easing package and in particular the timing of the restarting net asset purchases but she has suggested that continued monetary accommodation is warranted, warning against premature rate hikes Fabio Panetta replaced Benoit Coeure and is so far being read as a relative dove as a supporter of the ECB’s policies. Panetta has spoken in favour of the September easing package and believes QE is effective in supporting growth and inflation. Data Stabilising – ECB to Adjust the Balance of Risks? A common theme in bank research ahead of the ECB meeting is the ongoing stabilisation or bottoming out of Euro Area economic data. Lagarde noted this at the December meeting saying “incoming economic data and survey information, while remaining weak overall, point to some stabilisation in the slowdown of economic growth in the euro area”. The Euro Area composite PMI stabilised in Q4 ’19 after ~2yrs of decline. In December the OECD’s Euro Area leading indicator rose first time in 2 years. Core inflation has risen back to 1.3% and stayed there for a couple of months and market-implied inflation expectations have rebounded slightly. However, some also note that, while there have been some more positive indications on industrial sentiment, there has not been a clear rebound yet in manufacturing activity and in particular the German auto sector. Many note that downside risks to the growth outlook have receded given lower Brexit uncertainty progress in the US-China trade talks. Again, this was already picked up on at the December meeting which noted: “risks surrounding the euro area growth outlook […] remain tilted to the downside, but have become somewhat less pronounced”. Some see a risk that the ECB switch to a “broadly balanced” risk assessment but few are actually calling for this. Some believe the ECB could further water down the downside wording, perhaps as Goldman Sachs suggest to “significantly less pronounced” or even “moving towards a more balanced configuration”. Others, like ING, think the ECB will wait until the next set of staff forecasts in March before tweaking their language. It’s worth noting that, even if the ECB do positively tweak their balance of risks wording, analysts generally do not expect any change to the ECB easing bias yet. Goldmans think that Lagarde will try to avoid the market reading a change as too hawkish by reiterating the message from the December meeting account that the ‘reversal rate’ has not been reached. Tiering Multiplier: Some are watching for any comments on the rate tiering multiplier from the ECB. The ECB noted in September that this could potentially be adjusted and the December meeting accounts also referenced this. However, it seems early to change it yet given it’s only a 2.5 months since it was launched and operations have appeared smooth so far. The ECB will also want to avoid giving any inadvertent signals on monetary policy that a quick adjustment might imply. Strategy Review: Most analysts expect the focus and highlight of the January meeting to be the official launch of the ECB’s strategic review – the first since 2003. Lagarde said at the December press conference that it should be started in January and completed before the end of the year. This would be a relatively quick process if the timetable is adhered to – Morgan Stanley note that other leading central banks have taken an average of 21 months to complete similar reviews. The official launch of the strategic review is widely expected and would not be news as such. However, analysts will be very keen to get any details on the agenda, factors to be considered and timeline. Lagarde has already said that the review will “re-examine the effectiveness, appropriateness of each and every single instrument that we've used in the past to take assessment of that. Then to redefine for ourselves what exactly will be this medium-term objective that will deliver on the mandate that we have”. Whilst no analysts are expecting Lagarde to give any predictions about the conclusions of the review, many have made predictions on what the ECB will decide. A common theme is a new symmetric 2% inflation target, potentially with a tolerance band, consistent with the shift in communication from Draghi at the end of his tenure. Others think the ECB will avoid using a specific tolerance band and use wording like “around 2%” to maintain maximum flexibility. Analysts are also expecting a discussion around which measure of inflation is used. After the December meeting accounts, Nordea suggest the new measure could include the cost of owner-occupied housing. Desks see discussion around other tools in the monetary policy tool box, negative side effects, climate change considerations, communication of policy, digital money, role and reliability of inflation expectations will be studied. Highlights from ECB Policy Statement, Lagarde’s December Introductory Statement and Q&A: Interest Rates & forward guidance: “…the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.50% respectively. The Governing Council expects the key ECB interest rates to remain at their present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2% within its projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics.”. QE (Asset Purchase Program or APP): “On 1 November net purchases were restarted under the Governing Council’s asset purchase programme (APP) at a monthly pace of €20 billion. The Governing Council expects them to run for as long as necessary to reinforce the accommodative impact of its policy rates, and to end shortly before it starts raising the key ECB interest rates.” Lagarde statement 1^st comment on the economy: “incoming data […] point to continued muted inflation pressures and weak euro area growth dynamics, although there are some initial signs of stabilisation in the growth slowdown and of a mild increase in underlying inflation in line with previous expectations. Ongoing employment growth and increasing wages continue to underpin the resilience of the euro area economy.” On growth outlook risks: “The risks surrounding the euro area growth outlook, related to geopolitical factors, rising protectionism and vulnerabilities in emerging markets, remain tilted to the downside, but have become somewhat less pronounced.”