Surprising if the ECB adds further stimuli today – Danske Bank

Research Team at Danske Bank, suggests that given the Bank of England (BoE) refrained from any immediate ‘Brexit easing’ last week, it would be a surprise if the ECB adds further stimuli today.

Key Quotes

“However, given the potential negative impact of the referendum and the recent drop in market inflation expectations, a dovish rhetoric is widely expected, underlining that the ECB is ready to step up easing in case the economic outlook weakens over the coming months.

We expect the ECB to ease monetary policy at the September meeting, when new ECB staff forecasts become available. Our call is that the QE programme will be boosted temporarily to EUR100bn for the rest of the 2016 and that the programme will be extended until September 2017. We do not forecast any further rates cuts from the ECB.

The EGB market will closely scrutinise any comments on the ECB bond purchase programme, especially as an increasing number of German bonds have become ineligible for ECB purchases after the Brexit vote. The ECB might in fact ‘run out of bunds’ later this year. The ‘bund scarcity problem’ has prompted speculations that the ‘capital key’ could be changed to a ‘debt key’, which would benefit especially the periphery at the expense of the long end of the German curve. However, again we doubt we will see any changes today. Any technical changes are likely to be announced together with new stimuli at the September ECB meeting.

A dovish ECB will not have a significant effect on EUR/USD, as the central bank is unlikely to signal a forthcoming rate cut at the meeting. However, we continue to expect that EUR/USD will fall towards 1.07 over the coming three months on relative growth divergence.”