Draghi in corner after ECB expectations revision

Draghi in corner after ECB expectations revision

Downwards revisions to the European Central Bank’s (ECB) growth forecasts have raised expectations of yet more unconventional policy measures from the central bank in the coming months.

Though the ECB held rates as anticipated, but some analysts had expected upward revisions to the ECB’s March forecasts, which predicted inflation would reach 1.6 per cent by 2018, with GDP growth at 1.8 per cent by the same point.

The central bank did revise its 2016 predictions upwards slightly, but made no material adjustments to longer-term forecasts. This is despite its previous estimates being made using a $35 oil price.

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The oil price is now closer to $50, but new forecasts from the central bank showed a 10 basis point drop in GDP expectations by 2018, with inflation expectations remaining the same. That suggests the oil price rise, and the ECB’s current stimulus programme, may not be enough to get the economy motoring.

Many are predicting additions to the Bank’s monetary expansion programme later in 2016.

Pioneer Investments’ head of European fixed income Tanguy Le Saout said the lack of revisions to expectations showed the ECB is still “somewhat dovish”.

“Given that the ECB inflation forecasts are still below their target of ‘close to, but below 2 per cent’.... the door [is] open for an extension of the current quantitative easing (QE) programme, but we suspect that if this extension is announced, it will probably happen at the September 2016 meeting,” he added.

Jonathan Loynes, chief European economist at Capital Economics, said: “If we are right in expecting growth to slow as the previous boosts from lower oil prices and the euro fade, while core inflation remains very weak, the pressure for extra policy support is likely to build.

“We retain the view that another extension of the asset purchase programme will be announced in the second half of this year.”

Howard Archer, European and UK economist at IHS Global Insight, said he believed any further action would focus on unconventional measures rather than a further cut to interest rates.

“While the ECB has indicated interest rates could possibly go lower, there is clearly heightened concern over the impact that negative/low interest rates are having on eurozone banks.”

The ECB also produced details on its plan for corporate bonds, in a bid to soothe some market participants’ concerns.

Investment Adviser noted in May that credit managers were wary of the unintended consequences of the ECB’s foray into the private debt market.

While the managers welcomed the tightening spreads as a result of the ECB’s anticipated entry, Artemis Strategic Bond manager James Foster cited a number of concerns, including liquidity issues.

But the ECB said last week: “When buying in the secondary market, [we] will consider, inter alia, the scarcity of specific debt instruments and general market conditions.”

The central bank added it would not be a forced seller of debt in the event that its holdings, which are confined to investment-grade bonds, were downgraded to high-yield status.