ECB: Little change expected - BBH

The outlook for the ECB meeting has moved in the opposite direction of the BOJ and while the BOJ's meeting has become more important for investors, the ECB meeting has become less so as little change is now expected.

Key Quotes

“Whatever changes are delivered will be subtle.  The broad course of policy is understood.  The ECB is buying 30 bln euros a month in assets, mostly government bonds.  It will do so at least through September.  We suspect that some time, probably July, the ECB may signal that it will further taper its purchases in Q4 when they are complete.”

“Until then, the ECB's assessment and forward guidance will gradually evolve.  Its risk assessment must change.  The ECB may soon feel more comfortable in modifying or dropping its pledge to increase its asset purchases if needed.  This seems implicit, in any event.”

“With the eurozone enjoying the broadest economic expansion in a decade, Draghi's call for patience and persistence may seem out of sync.  Yet here is the difficulty.  The ECB's single mandate is for stable prices, which has been operationally defined as near but lower than 2%.  The advanced reading for February's CPI was 1.2%.  In February 2017 it stood at 2.0%.  That was mostly energy.  Core rate now stands at 1.0%.  It was at 0.9% in February 2017.”

“There does seem to be some upward pressure on service prices, though the fall in oil prices may drag the headline lower.  The OECD model has the euro the most undervalued currencies (~8.6%).  On a trade-weighted basis, the euro is largely flat.  It had appreciated a little more than 1% through early February, but since then it has eased.  It is now virtually unchanged on the year and about 0.5% above its 100-day moving average, to put it in perspective.”

“Draghi often cites surveys, and he may recognize that there has been some loss of momentum, though the levels are still elevated.  He may also mention the improved lending to businesses that were contained in last week's money supply report.  He may be asked about the nomination of Spain's finance minister to succeed Constancio as his deputy.  The ECB is reportedly going to make a formal statement at some juncture.  Draghi has noted that the ECB is an independent entity and it will remain so.”