- The ECB Governing Council will meet against the backdrop of a continued decline in oil prices
- We expect the ECB to decide on an expansion of its asset purchases after the results of next week’s TLTRO operation
- US private hiring strong. Fed officials signal more confidence, moving Fed nearer to first rate hike
ECB to wait until next year before deciding on more QE
The ECB Governing Council meets in its new Frankfurt headquarters today against a backdrop of continued declines in oil prices. With inflation already at very low levels and expected to flirt with zero in the coming months, the question is whether this has unsettled the ECB enough to announce further policy easing measures today. Although various ECB officials have signalled that the central bank stands ready to expand its asset purchases, we think it will wait until next year to take this decision. The central bank expects a lot from the TLTROs’ contribution to its planned balance sheet expansion of a trillion euro. Next week’s second TLTRO operation will provide a strong signal about how successful the programme will be. We therefore expect the Governing Council to wait until next year before deciding on an expansion of its asset purchase programmes.
Conditions on TRLTOs could be eased
Having said that, there is a possibility that the central bank will ease the conditions of the TLTROs today, in order to increase the chances of a bigger take-up next week. Since the initial announcement of the TLTROs, alternative sources of bank lending have become cheaper. So reducing the lending rate or allowing banks to borrow more would be an option.
ECB’s inflation forecasts to be revised lower
Meanwhile, the drop in oil prices will very likely result in the ECB revising lower its forecasts for inflation in its new staff projections. In September the central bank expected inflation to be 0.6% this year, 1.1% in 2015 and 1.4% in 2016. Given the recent trends in inflation and oil prices, the inflation forecasts are very likely to be revised lower. With regard to the GDP growth forecast of the ECB staff, the picture is more mixed. In September, GDP growth of 0.9% was forecast for this year, 1.6% in 2015 and 1.9% in 2017. We do not expect serious downward revisions. These forecasts are close to our own scenario for the eurozone economy. Indeed, the drop in oil prices should add some stimulus to the economy.
Steady gains in US private payrolls
Private employers continue to add jobs at a steady pace. The ADP National Employment Report showed private payrolls increased by 208K in November down from a revised 233K the previous month (initially reported 230K). The outcome was slightly lower than the consensus of 222K. The rise in employment came mainly on the back of small and medium sized firms, which increased hiring by 167K. The ADP report is generally an appetiser for Friday’s nonfarm payrolls. We forecast a growth of 220K for private nonfarm payrolls. In another report released yesterday, the service industry rose at three month high. The ISM non-manufacturing index increased to 59.3 from 57.1 the previous month.
Fed officials signal more confidence
In the past few days, Fed officials Mr. Fischer and Mr. Dudley have been signalling more confidence in the US economy, as well as the benefits from lower oil prices for economic activity. Fed Vice Chairman Fischer signalled that the Fed is getting closer to dropping the “considerable time” phrase in the FOMC statement, a forward guidance used to signal that rate increases are way off. We think that the pace at which the slack in the labour market is diminishing and the stronger economy, suggest that the Fed is on track to raise interest rates in mid-2015.