BAML said the ECB meeting has the potential to surprise as the bank strives to demonstrate it can do more than rate cuts. It is likely to stop short of launching into quantative easing however, as there is no consensus in the Council over the tools to fight low inflation, BAML said.
BAML expects ECB to cut the deposit rate to -10bp and the refi rate to +10bp. Overall Draghi’s communication is likely to boost markets briefly however the effect will be short lived as investors digest the fact that the liquidity is still not out there yet, BAML added.
The growth in money supply in the Euro area is continuing to contract according to analysis by SEB, putting ever more pressure on Mario Draghi to act boldly. The money supply M3 growth reached 0.8% in April, the lowest level since September 2010. The main component of M3, the annual growth rate of M1 decreased to 5.2%. This slow growth in M3 adds further weight to the picture of subdued underlying price pressures in the euro area over the medium term, SEB noted.
Central expectations are for Draghi to signal a 15bps cut in the headline rate combined with an equivalent cut in the deposit rate taking it into negative territory, noted Neil Staines, head of macro trading and execution at ECU Group.
He said in his view the risk for investors is not that the ECB disappoints as has been the case on numerous previous occasions, but that the ECB act more decisively than expected and adds significant additional stimulus in the form of ‘non-standard’ measures.
Possible measures include reducing the minimum reserve requirement for banks, ending the sterilisation of SMP purchases, further LTRO’s or measures to specifically target bank lending. These may however have limited impact until after the European bank stress tests Staines added.
Staines also highlighted a quote from ECB vice president, Vitor Constancio as particularly worth paying attention to. Constancio has publicly said he hopes investors into Europe are ‘sufficiently hedged’.
