Regarding the ECB meeting, we don’t expect the ECB to announce new policy measures. They are in a wait and see mode since cutting rates at the May meeting. Economic data have improved since and inflation rebounded, easing pressure on the ECB to ease policy further. It is early days, but the euro area may have reached an inflection point economically and financial market wise. However, recent developments show that our conclusion on policy is not yet firmly anchored. The economic improvement is fragile and a further sell-off in yields may be difficult to digest.
Second, the euro crisis may flare up. The political crisis in Portugal over the past days suggests that also in the peripheral bond markets a negative surprise may spring up any time, even if we don’t think at this juncture the Portuguese crisis will lead to generalized contagion towards key countries like Italy and Spain. So, given these dangers, the ECB should keep an easing bias, something Mr. Draghi will express at the press conference. So, he won’t sound too upbeat on recent economic progress and will repeat that the ECB will continue “to monitor closely all incoming information” and “stands ready to act”. This effectively will mean the ECB sticks to a easing bias. To contrast ECB policy to the Fed’s policy, he will add the exit policy is for the remote future.
Attention will also be on his comments about new tools the ECB might develop for possible use if an easier policy is needed (and rates would touch the “zero” boundary). Forward-looking guidance is suggested by several commentators, while measures to support SME lending are also still under consideration. However, Mr. Draghi downplayed expectations on the subject at the previous meeting and also suggested that it would take more time to come up with concrete plans.