While headline inflation across the region came in flat at 0.1% for November, core inflation, which strips out the impact of oil fell to 0.9%, lower than the 1% imprint analysts were expecting. But, while most commentators agree that the European Central Bank is likely to both cut its deposit rate and raise the level of asset purchases, there remain divisions as to exactly how aggressive the moves will be and how best to play it.
Especially given the timing of the move, just two weeks ahead of the Fed decision that is expected to result in a hike.
Eric Lascelles, RBC Global Asset Management chief economist says that while Draghi has an impressive history of exceeding market expectations, which has led some to predict as much as a 20bps cut to the deposit rate and a 20bn euro per month extension of quantitative easing (possibly also with an open-ended commitment to continue past September 2016), he says this is probably a best-case rather than a base-case scenario.
“A more realistic base-case would be a 10bps cut to the deposit rate and an additional 10bn euros per month of quantitative easing, likely with some sort of modest (perhaps six months) extension beyond September 2016.”
Nick Gartside, international chief investment officer for fixed income at J.P. Morgan Asset Management agrees that the ECB is likely to make a 10bp move, but says it is the detail that will be important and the biggest impact will likely be the influence the moves have on the currency.
“In part, as justification for further stimulus action, we may see their inflation expectations come down marginally. The currency takes the strain of this, leading us to expect that the euro may well reach parity with the US dollar early next year.”
“A stronger US dollar helps achieve the tightening effect of rising interest rates, effectively doing the US Federal Reserve (Fed)’s work for it. We don’t think that changes the timeframe for a US interest rate hike, but it does weigh on both the pace of increases and the terminal rate that the US Fed reaches in their cycle,” Gartside pointed out.
It is in part, because of this, that JP Morgan is expecting a fairly shallow rate cycle. “Given the sequence of central bank actions in the next few weeks, with the ECB taking action first, it’s fair to say it could have a major influence on the US Fed.
