By Sara Sjolin, MarketWatch
The European Central Bank announces its last policy decision of the year on Thursday and while analysts don’t expect major surprises, there are still key issues that could stir financial markets.
The central bank in October announced plans to wean the eurozone off billions in monetary stimulus, saying it would halve its aggressive bond-buying program to €30 billion from €60 billion starting in January. The quantitative-easing program is now set to run until at least the end of September next year, depending on the inflation outlook.
On the heels of that announcement, traders are looking for more hints on interest rates and whether stimulus measures will be further tapered after September.
Here are three things to watch at Thursday’s ECB gathering that could offer clues on those developments:
1. New staff forecasts on GDP growth and inflation
Quarterly staff projections are released at the Thursday meeting and analysts expect a bump up in both economic growth and inflation expectations. Since the last set of forecasts were released in September, the eurozone economy has picked up steam, with survey data putting the region on course for its strongest quarterly expansion since the start of 2011.
The ECB will publish its first estimates for 2020, which will give a sense of how close inflation in 2020 will get to the ECB’s target of “below, but close to 2%”. That could indicate when the central bank will start to a path to its own policy normalization, which would include raising rates and unwinding its QE. Inflation in November stood at 1.5%, according to Eurostat.
“We expect a forecast of 1.8% [for 2020]. That would pave the way for a gradual scaling back of the ECB’s stimulus in line with its current guidance. A number below 1.8% would raise the risk of an extension of asset purchases beyond September 2018. This looks unlikely, though,” said Florian Hense, economist at Berenberg, in a note.
The rest of Berenberg’s forecast along with the ECB’s September predictions are laid out in this table below.
2. Any changes to the dovish language in policy statement
A key exercise at any ECB news conference is to look for any changes to forward guidance in the opening statement. At the October meeting, the bank said “we stand ready to increase the [asset purchase program] in terms of size and/or duration,” stressing that QE could go beyond September next year if necessary.
Since the last meeting, several Governing Council members have hinted they’d prefer to simply end the purchases altogether in September, which could dampen the dovish tone in December’s statement.
“While the ECB may possibly do this on Thursday already, we expect the bank to wait until March 2018,” said Hense from Berenberg. At this meeting, “the ECB will stress that the overall monetary stance remains accommodative and will turn only slowly less accommodative.”
Most analysts side with Hense and expect Draghi & Co. to stick to their dovish script for now. However, Naeem Aslam, chief market analyst at Think Markets UK warned that investors are underestimating the chance of a hawkish surprise as Draghi emphasizes the stellar economic progress in the currency union.
“Thus, there is a clear scope for the euro to move higher as the market gets a surprise when Draghi takes the stage. The euro-dollar pair has the potential to touch the 1.20 mark on Thursday and the bond yields could pop significantly,” he said in a note. The euro /zigman2/quotes/210561242/realtime/sampled EURUSD +0.0095% against the dollar stood at $1.1831 on Thursday, down slightly from $1.1827 late Wednesday in New York.
3. Bond buys in 2018
Finally, analysts are watching for any details on the makeup of the QE program once it is halved in January. The central bank said at the last meeting that corporate purchases will remain sizable and not shrink to the same extent as the overall program.
There has been, however, speculation that the ECB on Thursday will discuss the composition of the future QE program, in particular how much would consist of corporate bonds versus government paper.
“But overall we think this is not very likely because the ECB may need all the flexibility there is within the program to allow for a smooth operation. In fact, it seems more likely that Mr. Draghi will again warn that weekly and monthly purchase amounts by jurisdiction and specific program are likely to become more volatile going forward,” said Elwin de Groot, head of macro strategy at Rabobank, in a note.
The ECB rate decision is slated for 12:45 p.m. London time, or 7:45 a.m. Eastern Time, followed by Draghi’s press conference at 1:30 p.m. London time, or 8:30 a.m. Eastern.