ECB meeting to hold few surprises - MUFG

Derek Halpenny, European Head of GMR at MUFG, suggests that the ECB meets this afternoon in Vienna with this meeting also incorporating an update of ECB projections.

Key Quotes

“The meeting takes place just as the latest phase of monetary easing gets going with the Corporate Sector Purchase Program commencing as of yesterday while the new TLTROs will also begin this month. In that context, the meeting today is going to be a bit of a non-event and we expect little in the way of euro volatility. 

The focus really will be on the updated forecasts for real GDP growth and inflation. Here, there may well be some good news for the ECB with a reasonable chance of a very slight upward revision to the inflation forecasts. The technical assumptions made in March for crude oil prices for this year through to 2018 were all lower than the current spot price which makes it a certainty that the crude oil price assumptions used for the forecasts will be higher than those in March.

With real GDP growth projections probably roughly unchanged, that leaves crude oil as a determinant that could result in a slight upward revision. The forecasts for annual inflation in March for the period from 2016 to 2018 were 0.1%; 1.3% and 1.6%. Real GDP was forecast to slow 0.1ppt this year to 1.4% and then pick up to 1.7% in 2017 and 1.8% in 2018. Again, there is a slight chance here of an upward revision to the 2016 growth level.

So the general tone of today’s press conference may be cautiously upbeat with President Draghi again emphasising the view that the monetary policy stance of the ECB is working to support growth. Given the ECB will be in such a position today and given there is no pressure on the ECB for further action at present, President Draghi may well take the opportunity to up the pressure on euro-zone governments to do more. The OECD yesterday when releasing its semi-annual Economic Outlook report was highly critical of governments globally for not doing more in regard to investment spending and structural reform.

Certainly in regard to investment spending, the ECB must surely believe that Germany could be doing more. Since the last meeting German data on its current account showed a record surplus was recorded in March with the Q1 surplus some 8.5% of GDP. That huge surplus and the zero balance government budget points to scope for action to help boost domestic demand and bring down the current account surplus – the size of the surplus is certainly a key factor in the lack of downward momentum for the euro despite the ongoing monetary stimulus by the ECB. It is clear that the German current account surplus has been trending higher throughout the single currency era and with the ECB attempting to reduce internal balances, the trend in Germany’s current account position will be an increasing concern.”