ECB Likely to Sit Tight on 21 July But Indicate Prepared to Take Further Stimulus
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We expect Mario Draghi to indicate that the ECB is fully prepared to take further stimulative action if Eurozone growth and inflation prospects deteriorate as a consequence of the UK’s vote to leave the EU. He is also likely to address heightened concerns over the European banking system centered on Italy. The ECB has responded to the United Kingdom’s vote to leave the European Union by stating that it is ready to provide additional liquidity if needed, in euro and foreign currencies. The ECB has also indicated that it is prepared to take whatever action is necessary to ensure price and financial stability.
The Eurozone’s exit from deflation in June and the recovery in Eurozone markets after the immediate post-Brexit vote plunge eases pressure on the ECB to take any immediate policy action. This is reinforced by the Bank of England holding off from loosening monetary policy at its 14 July meeting.
Another reason for ECB action now is that by its September meeting it will have some clear evidence as to how Eurozone economies have been initially affected by the Brexit vote. The Governing Council will also have available the ECB staff’s new Eurozone consumer price inflation and GDP forecasts that are produced quarterly.
For now at least, we expect the ECB to stay in “wait and see mode” and continue to focus on implementing its March package of measures. The ECB’s recent mantra has been that patience is needed in getting Eurozone consumer price inflation up near to 2.0%.We believe that if the ECB does eventually feel further stimulative measures are necessary to counter the downside risks to the Eurozone growth and inflation forecasts coming from the Brexit vote, it would most likely be through extending non-conventional measures - in particular the length of its Quantitative Easing programme and possibly also the monthly amount of purchases).
We are doubtful that the ECB would take interest rates any lower with the deposit rate already at -0.40%. While the ECB has indicated that interest rates could possibly go lower, there is clearly heightened concern over the impact that negative/low interest rates are having on Eurozone banks.
At Thursday’s meeting, the ECB is likely to call yet again the need for structural reforms across the Eurozone to boost growth, especially in the aftermath of the Brexit vote. The ECB has repeatedly - including in the account of its June meeting – emphasized the need for policymakers across the Eurozone (at both a national level and European level) to play a full role in supporting long-term growth. The ECB has stressed the particular need for structural reforms aimed at boosting productivity and lifting employment. The ECB has also noted that specific reform needs differ across individual economies.
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