Monex: Komt de ECB donderdag dan toch met een renteverlaging?
Monex: Komt de ECB donderdag dan toch met een renteverlaging?
The July 25th ECB meeting will be very much a live meeting as the markets price in more or less a coinflip between holding rates at -0.4 percent, or a 10 basis points cut to -0.5%. The chart also reveals the real question (according to OIS futures market pricing, at least), which is not if the ECB is going to cut rates, but when. Monex indeed expects the ECB to cut the rates by 10 basis points in the July meeting, justified by cratering inflation expectations and soggy economic data. Mario Draghi will start preparing for a dovish legacy by keeping all options open, reminiscent of his ‘whatever it takes’ speech in 2014 and stressing that both further rate cuts and a re-opening of the Asset Purchasing Program remain part of the ECB’s toolkit.
The number one thing the ECB wants to prevent is inflation expectations being anchored at extremely low levels, which would bring the Eurozone frighteningly close to a deflationary spiral again, just like in 2014. The near-record low inflation expectations indicated by 5 year inflation swaps will spike nerves into the ECB members, justifying aggressive action now before these inflation expectations slip further down towards the realm of doomful deflation. Additionally, Purchasing Manager Indices suggest that inflation pressures have moderated as retreating demand forces companies to compete more on price. This is then the main channel through which the weaker performance of the manufacturing industry (mostly the export-oriented part, and mostly in Germany) cause more dovishness in the ECB’s rate-setting monetary policy. Simultaneously, activity indicators and disappointing retail sales data (again in Germany, and in Italy) suggest the consumer may be able to pick up the baton manufacturing dropped, but definitely not run with it.
Draghi has plenty of reasons to leave his successor Chrisitine Lagarde in a dovish bind with inflation expectations plummeting, while the macroeconomic situation is worsening and external risks (trade war, Brexit) remaining stubbornly present. A rate cut and words will be sufficient for now, but don’t be surprised if he leaves Lagarde with an even lower interest rate level and an APP about to reboot when he hands her the ECB scepter in October.