ECB Preview: One Final Talk Before Walking The Walk

It's a very close call but we expect the European Central Bank to change its forward guidance next week and effectively pre-announce a package of new measures at the September meeting.

ECB President Mario Draghi delivers a speech at the European Parliament in Strasbourg back in January

A dovish press conference after the June meeting, an even more dovish speech by Mario Draghi in Sintra and very little evidence that the economic outlook is about to improve any time soon.

Against this backdrop, it will be very hard for the European Central Bank to send a sufficiently dovish message without actually delivering at next week’s meeting. In our view, the discussion within the ECB’s Governing Council will be an exciting and heated one.

Dovish, more dovish, most dovish or simply action?

In fact, Draghi’s Sintra speech has made clear that the question regarding the short-term outlook for the ECB is no longer “what negative surprise is needed for the ECB to cut rates” but rather “what positive surprise could actually prevent the ECB from cutting rates”. This is how we read Draghi’s comments that - absent economic improvements - more stimulus will be needed.

Economic data out of the eurozone, as well as the Fed’s de facto announcement of a July rate cut, have clearly pushed the ECB closer towards July action, rather than waiting until September. After some tentative signs of stabilization at the end of the first quarter, the eurozone economy seems to have slipped once again. What is also worrying is that there are signs the solid domestic part of the economy may be faltering as well. In particular, German data is worrisome with an increase in short-term work schemes, fading momentum in the labor market and falling retail sales.

Consequently, for next week’s meeting, the main question is whether the ECB can afford to wait six more weeks before delivering a new monetary stimulus or whether it should surprise financial markets by frontloading new measures. In fact, traditional ECB watching argues in favor of compiling more data, waiting for the release of 2Q GDP in mid-August and the next ECB staff projections and only then taking a decision at the September meeting. Draghi’s track record of over-delivering and trying to be ahead of the curve, however, could bring new ECB action at the ECB’s July meeting. It's a very close call, which will only be decided during the meeting next week.

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