By Dhara Ranasinghe and Tommy Wilkes
The ECB meets on Thursday against a backdrop of concern about a global trade spat and a softening in eurozone economic data that could potentially hamper its plans to unwind its extraordinary monetary stimulus.
In March, the ECB dropped a long-standing pledge to increase its bond buying if needed, taking another small step in weaning the eurozone economy off protracted quantitative easing (QE).
Just how much recent economic and international developments are impacting the ECB’s plans to unwind QE could well make for a lively debate.
Here are some of the key questions on the radar for markets:
- Will there be changes to forward guidance? Probably not. Having taken another baby step last month towards unwinding the €2.55tn asset purchase scheme, the ECB is not expected to make any changes to its policy outlook on Thursday. “It’s in the ECB’s interest to say and do nothing,” said Pictet Wealth Management economist Frederik Ducrozet.
- So can we expect a hawkish or dovish ECB? More likely dovish than hawkish. Worries about a firm currency, a possible US-China trade war and economic momentum slowing suggest ECB chief Mario Draghi is likely to sound a cautious note at the post-meeting press conference. Money market pricing suggests investors have pushed expectations for a rate rise further into 2019 and talk in January that the ECB could wind up QE in September when asset purchases are scheduled to end has proved short-lived.
- How concerned is the ECB by a global trade war? The risk of a full-fledged trade war between the US and other major economies was on the ECB’s worry list last month and is likely to feature prominently once more.
Will the ECB address the softening economic data? Indeed, recent weeks have seen further evidence that the eurozone economy has peaked and this is something Mr Draghi is likely to be pressed on. Eurozone firms ended the first quarter with their weakest expansion since the start of 2017, according to the March Purchasing Managers’ surveys. Inflation rose less than estimated last month and investor morale in powerhouse economy Germany has tumbled. Still, the IMF last week raised its forecast for German economic growth and the ECB is likely to play down recent disappointing data, analysts said.
- What about the strong euro? Analysts are divided on the effect on the trade spat on the euro but many investors remain bullish on the currency as investors put money back into the region, and the ECB may repeat concerns over the potentially harmful impact of euro strength.