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ECB Meeting: What To Look Out For?

The economic situation in Europe has improved since the last ECB meeting.

But that doesn’t necessarily mean that there will even be talk of a change in policy.

Policy outlook had been on hold since regulators and the market were waiting for the new staff projections, which will be published at the end of this meeting.

Many analysts are suspecting that the ECB will try to put the focus on their new outlook, instead of bringing up the issue of how to wind down their asset purchasing program.

Most major central banks in the world are starting to face the dilemma of when to start slowing down their support for the economy, as stores reopen and inflation fears build.

Kick the can down the road
For now, the theme seems to be to try and avoid mentioning the issue for as long as possible. Especially since everyone knows just talking about tapering is likely to weigh on the markets. This is particularly the case for the EU, as it is farther behind in economic normalization.

Even though the situation with vaccines has been improving, the constant reports of new variants and the persistence of the virus mean that uncertainty remains latent.

Central banks will be very wary about announcing a taper and then have to reverse themselves if there is an unexpected worsening of the virus situation.

For this reason, there is a building consensus that we won’t see any policy modification by the ECB.

Additionally, President Lagarde will convey a more positive outlook during the post-rate decision press conference. She has to tread a delicate balance of conveying an upbeat tone for the markets while also not allowing for a hint of tapering. This could push bond yields higher.

Higher bond yields in anticipation of the ECB cutting its bond-buying program would defeat the purpose of the bond-buying program.

What to look out for
The main takeaway from the meeting will likely be the revised staff projections, which will come out along with the rate decision.

This allows analysts and investors to recalibrate (if necessary) when they can expect policy normalization and a rate liftoff (if that will ever happen).

The prior staff projections from March expected a GDP growth of 4.0% this year and 4.1% next year. The consensus is that this might either be raised slightly or “forward loaded”; that is, faster growth in 2021 but slower in 2022.

Both would likely have a positive effect on the euro.

However, it’s a rather uncertain consensus, as Q1 GDP missed expectations. Hence why there is a minority of analysts who are projecting a cut by a couple of decimal points. That, naturally, would weaken the euro.

Projections were originally for inflation to come in at 1.5% this year, and 1.2% next year. We can also expect this to rise and potentially have a bigger impact on the markets.

The ECB has a target of 2.0% annual inflation. Therefore, if projections increase but remain below that threshold, the effect on the market will likely be muted.

However, if inflation expectations are raised more than that, it could seriously change the projections for the rate trajectory.

This is despite the ECB hinting, like other central banks, that inflation moving above the target wouldn’t be an automatic trigger for intervention.

Wednesday, 09 Jun, 2021 / 1:34

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Source : https://www.orbex.com/blog/en/2021/06/ecb-meeting-what-to-look-out-for

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