Expectations management will be ECB President Draghi’s principal task on Thursday. In this context, he will not have the option of repeating last month’s strategy of saying nothing. In particular, Draghi is likely to push back against any suggestion that there will be any near-term move to tapering bond purchases. He is also likely to pledge a full review of policy for the December meeting and maintain the aggressive commitment to meeting the ECB inflation target.
The most likely outcome is that the Euro will weaken, although great caution is needed given the risks of aggressive short covering on any disappointment. If looking to trade on dovish rhetoric, buying European equities would be likely to offer better value.
The ECB will announce its latest decision on interest rates on Thursday and there is no real chance that the main refi rate will be changed at this meeting.
The main focus should be on the bond-purchase programme, especially given increased market speculation over the programme’s future.
The ECB is facing the approach of several deadlines and a mishandling of short-term policy or market signals could trigger major instability within the Euro-zone.
As it stands, the bank has pledged to maintain the EUR80bn per month in bond purchases until March 2017 and for longer if necessary in order to meet the inflation target. As March 2017 approaches, the degree of market speculation surrounding the policy will inevitably increase.
The ECB originally imposed limits on the amount of bond that could be purchased with a limit of 33% of the total volume, while the national banks are unable to buy bonds, which yield less than the deposit rates, which currently stands at -0.40%.
The amount of bonds eligible for purchase is reaching very low levels, especially in Germany, which could run out of bonds within two months. There is a small chance that the ECB could cut the deposit rate to alleviate the stresses, although a temporary relaxation of measures would be more likely.
Headline inflation has increased to a nine-month high of 0.4% and will increase further over the next few months as base effects unwind. There will be increased pressure on the ECB to suspend bond purchases if the headline inflation rate moves above 1.0%.
The ECB is also increasingly frustrated at the failure of Euro-zone governments to capitalise on the period of very low interest rates and boost growth prospects through fiscal and structural measures. There are likely to be increasingly strident calls for urgent action.
Last month, there were source reports that the central bank was close to reaching a consensus on the need to taper bond purchases before the programme is completed.
Earlier this month, there were reports that the ECB was considering making small adjustments to the purchase programme, but might not make an announcement until the December meeting.
Draghi would probably again prefer to say nothing of substance at this meeting, but this would be a dangerous strategy as it would substantially increase the risk of market rumours and volatility. He will also have to face numerous difficult questions in the press conference.
It will also be very dangerous for Draghi to let tapering speculation out of the bag at this point, although he will inevitably face tough questioning about this.
In this context, Draghi is likely to signal that the bank will review policy actions with a view to making an announcement at the December meeting. He is also likely to insist that the ECB will use all of its resources to meet the inflation target.