The next ECB meeting should confirm both the assessment of the economic outlook, and the monetary policy picture outlined in recent months. Improved economic data make the adoption of new expansive…
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measures unlikely. Analysts almost unanimously expect the ECB’s Governing Council to leave policy rates unchanged at at 0.50%, the deposit rate at zero, and the marginal refinancing rate at 1.00%. The July statement left open the option of an intervention on the structure of policy rates, without ruling out even the bold potential step of imposing penalties on excess reserves. Forward guidance (the main innovation introduced at the July meeting) guarantees rates in line with, or lower than, their current levels, for an extended period. However, in the past few weeks economic data improved more than expected, which would make it harder to justify a slackening of monetary policy.
Firstly, monthly surveys revealed a significant improvement in June and July. In July, the flash PMI estimates surged to 50.1 (+1.3 points) in the Manufacturing sector, and to 49.6 in services (+1.3), marking the third consecutive monthly increases. The INSEE index improved to 95 from 93, and the IFO index to 106.2 from 105.9. In Spain as well, expectations point to an only marginal contraction in GDP already in 2Q, whereas in Italy hopes are that an improvement will be visible in data releases at the end of July and in early August (PMI, Istat survey of economic confidence). Taken together, the data available seem to increase the likeliness of the economic recovery scenario in 3Q materialising, and make a policy rate cut more difficult to justify. We do not think contained inflation growth (1.6% y/y in June, 1.3% excluding energy and fresh food) may affect these conclusions. Price growth is likely to slow further in the coming months, but does not seem to be a sufficient factor to justify radical moves such as the introduction of negative rates on deposits with the central bank. However, several members of the Council have stressed that the moderate trend of inflation is a crucial condition for forward guidance on rates to be kept in place.
As regards financial stability, the decline in excess reserves continued, with the gradual repayment of LTRO funds taken out in December 2011 and February 2012, and the narrowing of imbalances among national central banks (Target II balances). The markets have taken in their stride the political crisis in Portugal and the usual hitches that come with the review of the Greek bailout plan. The rise in medium and long-term rates between May and June has partially reversed, following the Fed’s reassurances on the timing and conditions of the normalisation process, but also thanks to the ECB’s guidance on policy rates. The effective exchange rate of the euro is only marginally stronger. The credit restriction trend is gradually reversing, as signalled by the Bank Lending Survey. Given current conditions, therefore, the ECB is unlikely to announce new non-standard measures. Already on 18 July, it should be noted, the Governing Council announced a number of changes to eligible assets: a more penalising treatment of covered bonds retained by the issuer, an easing of rating criteria on ABS subject to the obligation of detailed reporting, and a reduction of guarantee margins on ABS in general. These measures, however, are more relevant in technical than economic terms. The two elements that contribute most to stability remain full allocation at refinancing operations, and the availability of the OMT programme.
In conclusion, on Thursday the President of the ECB is likely to acknowledge the improvement in European monthly data, confirming on the whole the economic outlook and the monetary policy picture outlined in recent months. As regards the balance of risks, it seems too early for the time being to entirely dismiss downside risks to growth. If this were the case, however, forward guidance should guarantee limited repercussion, compared to those already observed in the wake of positive data released on Wednesday 24.
Appendix
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