- We set out three big issues to watch out for in President Draghi’s presser this week…
- …our base case is that the ECB will expand and extend its QE programme in December
- China’s third quarter growth better than expected – signs that negative momentum is easing
ECB on hold this week, but action in December
We expect the ECB to keep policy on hold this week. The deterioration in the inflation outlook justifies a move already in our view, but Governing Council members have been lining up to say action this week would be premature. Our base case is that the ECB will step up QE at the December meeting, by extending the end date (beyond September 2016) as well as increasing the monthly purchase size (by EUR 20bn).
Three things to watch
Despite the likely lack of action in October, the meeting could prove to be an interesting one, as we could get a clearer idea of future action. We set out 3 big issues to watch below.
Risks to inflation
At the September meeting, the ECB revised down its medium term inflation projection to 1.7%. At the same time, Mr. Draghi noted that the risks to that forecast were to the downside given the developments in the technical assumptions since the cut-off date. This remains the case in our view, with the euro higher than the ECB expected and oil prices lower (see chart). This means the ECB President should confirm the downside risks. If he does, that would be a strong signal that further easing was on the agenda.
Changes to QE programme
If it becomes clear that more action is on the cards, the next big issue is exactly what the ECB will do. In September, the Governing Council stressed its ‘willingness and ability to act’ noting that ‘the asset purchase programme provides sufficient flexibility in terms of adjusting the size, composition and duration of the programme’. It will be interesting to see whether the President gives any more specific signals about how it could adjust the QE programme.
Deposit rate cut
Up now the ECB has given the guidance that its policy rates had reached the lower bound, and would therefore not be cut further. Any failure to repeat this line when questioned in the press conference, could be a sign that a policy rate cut is back on the table as an option to ease policy further, either on its own or together with a QE extension. A deposit rate cut could be particularly effective in pushing down the euro.
China third quarter growth better than expected…
China’s Q3 GDP growth was slightly stronger than expected, slowing to 6.9% yoy in Q3, down from 7% in both Q1 and Q2. This suggests that China will on paper be able to meet the 7% growth target for 2015 announced by China’s authorities. Although the debate over to what extent China’s GDP growth figures are reliable is ongoing, other economic data for September show that the third quarter is ending on a more positive note. Indeed, services output rose to 8.6% in Q3 up from 8.4% in the first half of the year. Meanwhile, despite structural problems in the real estate sector, property sales are showing some improvement, growing at 7.5% yoy in the year to September up from 7.2% in the first eight months. On top of this broad credit growth accelerated to a nine-month high in September. This could raise concerns of the trajectory of China’s debt levels, but in the short run it’s supportive for economic activity. Finally, retail sales growth also edged up.
…with signs negative momentum is easing
There remain, however, some major weak spots, including the ongoing significant slowdown in industry and investment. However, in terms of the whole economy, there are signs that the negative momentum is easing. With stronger fiscal spending in the pipeline and credit growth accelerating that process should continue. We think the authorities will do what it takes going forward to keep the slowdown gradual. Our GDP growth forecast for 2016 is 6.5%.