By Neil Mellor, Senior Currency Strategist, BNY Mellon
Perhaps the first thing to note about today’s meeting is that we get the latest staff forecasts. And yesterday, Bloomberg – citing officials in-the-know - claimed that we should expect a small downgrade to growth projections.
Bloomberg intimated that the primary motivation for the downgrade was global trade tensions. In July, Draghi was pressed on this subject in the Q&A; but very broadly speaking, his position was that there had been no impact on the data thus far, and that it would warrant further attention only in the event of “rounds of retaliation and rounds of responses”.
Whilst there has been no resolution on these matters, equally, relations have not deteriorated appreciably. And if Mr Draghi is willing to give the latest developments the benefit of the doubt, we may hear a broadly similar 'neutral' response to the one he gave two months ago.
However, the prospect of forecast downgrades certainly seems to be in keeping with the latest run of Euro-zone data for the start of the third quarter. The output expectations sub-index of IHS Markit PMI data fell to a (near) two year low in August; and July’s industrial production figures for Germany weakened far-beyond all expectations in a Reuters poll. Italy is a particular cause for concern, however, in view of the country’s already enfeebled debt dynamics: production fell by 1.8% m/m in July to yield the first year-on-year drop in two years.
Yet despite these trends – and a core Euro-zone inflation rate of 1.0% in August - Mr Draghi may be loath to deviate from “steady as she goes” guidance as the ECB prepares to wind-up APP. The fatter tail-end clearly lies on the dovish side of the risk profile for this meeting, but even so, the problem Mr Draghi would have is the limited means available to him to reflect this - at least without risking a marked reaction in the market place.
Political pressures are such that the scheduled year-end conclusion to the ECB’s asset purchase program may be seen as iron clad; and the Bank’s positon on reinvestments (from maturing securities) is already entirely flexible (“they will be invested in any case for as long as necessary to maintain favourable liquidity conditions”).
If compelled, Mr Draghi might therefore be limited to a shift in forward guidance. But then, the ECB’s pledge to keep its deposit rate at -0.4% "at least through the summer of 2019" has already been subjected to nuanced clarification. Mr Draghi may therefore feel that credibility is at stake if it is revisited so soon.
All in all, there is some downside risk to the euro if the ECB’s staff projections are downgraded per Bloomberg’s report, and/or if Mr Draghi’s warnings of the impact from trade war are taken to a new level; but otherwise, we believe that expectations of a bountiful take away from today’s statement and press conference should be suitably low.