ECB View: Setting the scene for downward revisions and further stimulus – There was much talk in ECB President Draghi’s last press conference of his legacy and rightly so. He has left Mrs Lagarde with some big shoes to fill. Though we see three key take aways in terms of the outlook for monetary policy in the coming months. First of all, Mr Draghi recognised that since September, ‘survey data have worsened, and the manufacturing slowdown seems to be spreading to the services sector’. Indeed, he noted the sharp decline in the services PMI.
Second, the ECB President did not seem to hold much hope for a large fiscal stimulus that would change the outlook for monetary policy. He noted that much of its effectiveness depends on the size and design of the so-called ‘fiscal capacity’ of the euro area. Although discussions were still ongoing, he did not see much chance it will be of ‘any significant size’.
Finally, he talked up the room for further monetary stimulus, saying negative interest rates had been a ‘very positive experience’. The issue(r) limits within the PSPP would not be a problem ‘anytime soon’ and in any case they could be changed if necessary as they were ‘state contingent’. Meanwhile, Mr Draghi did not see ‘bubbles’ in financial markets broadly. He said there might be local ones, but these should be dealt with using macroprudential policy tools. Indeed, he noted that the biggest risk for financial stability as well as price stability was an economic downturn.
We think these comments set the scene for downgrades of the ECB’s growth and inflation projections in coming meetings as well as additional monetary policy stimulus. As such, we maintain the view that the ECB will cut its deposit rate by 10bp in December of this year before stepping up the pace of net asset purchases at the March meeting next year (to EUR 40bn a month from April). (Nick Kounis & Aline Schuiling)