Thursday, 11 March, 2021
Bank views on ecb
BoA: expect no change at the ECB meeting although they look for much more clarity on the ECB’s definition of ‘favourable conditions’. They will also look for the ECB to provide reference levels and how the assessment of ‘favourable conditions’ vary over time. To cement the credibility of the message, BoA feels the ECB will need to show an increased rate of purchases. They also feel the ECB will highlight at this meeting that front end rates are no longer compatible with the inflation outlook which would be supportive of the front end.
Barclays: expect the ECB to concentrate on verbal intervention and emphasize its readiness to act instead of announcing an official increase the rate of PEPP purchases at this meeting. They nevertheless feel the potential for the ECB to be more dovish than their forecast is possible either by Lagarde announcing during the press conference that all of the PEPP envelope will be utilized or the pace of purchases by the PEPP will increase
Citi: expect this ECB meeting could be pivotal for duration. Although the sell-off in rates has lost momentum, volatility is still high and the sell-off could potentially restart fuelled by UK and US rates. If the PEPP purchase rate is increased, this could limit a further sell-off and be supportive on the long end. If no change in the PEPP purchase rate is announced, we could see the market have another test for higher yields. Difficult to determine the outcome of the meeting since, internally within the ECB council, there appears to be division on what should be the proper response to the sell-off.
Commerzbank: do not expect the ECB to announce a yield curve control at this meeting but does expect the ECB to increase its purchase rate from the €61bn average to €75bn per month. They also expect the ECB to affirm that National Central Banks will increase the average duration of their pruchases thereby counteracting the selling pressure. They view these actions as enough to stabilize valuations although not enough to completely counteract corrections that may be driven by US treasuries.
Danske: expect little action at this meeting although they believe it is a close call. The key questions for the ECB to answer is the recent rise in nominal and real yields an unwarranted tightening of financial conditions. Danske bank believes the ECB answer will be NO and they will simply state they are monitoring the situation. This would potentially result in upside risk to rates during the press conference. On economic forecasts they feel any revision will be cosmetic with a slight downward revision to GDP in 2021 by 0.2% while headline inflation in 2021 moves from 1.0% to 1.3% while core goes from 0.8% to 1.0%.
ING: expect this week’s meeting to bring more clarity to the reaction function of the ECB with regards to rising bond yields and rising inflation. No specific action will be announced at this meeting.
Investec: No change expected at this meeting either in interest rates or in QE parameters. The ECB will nevertheless stress that they will use the flexibility provided by the PEPP to fight against the tightening of financial conditions due to a sell-off in rates implying a potential increase in PEPP pruchases if needed. On the ECB financial projections, short term GDP growth will likely be revised lower but inflation may need to be revised closer to 2% for 2021. Original forecast for Q1 had been for inflation to be around 0.3% while in reality the number is likely much closer to 1% hence to strong revision upward.
JPM: expect no change in monetary policy at this meeting apart from verbal intervention in support of maintaining favorable financial conditions in the market. The ECB will be using this meeting to provide us with more insights on what it considers ‘favorable conditions’ and the potential triggers it would use to accelerate the purchases via the PEPP program. JPM feels verbal intervention should be enough to support the present level of markets if Lagarde can show there is unity on the council for backing such a move.
MS: expect the ECB to endorse the use of the PEPP’s flexibility to lean against further tightening of financial conditions. This could take the form of increase purchase rate, differentiation by country if wider spreads start interfering with transmission, increasing the duration of purchases as a form of twist to reduce the term premia in the long end.
Nordea: No change in Monetary policy expected at this meeting. With regards to the ECB’s response to the back up in yields of some 30bp, they expect verbal intervention but no formal yield or spread targets. On staff projections, both growth and inflation will be revised higher but mainly in the shorter term.
NWM: expect the ECB to use verbal intervention to state that a tightening of financial conditions will not be tolerated in this economic phase. This will also be supported by larger PEPP purchases moving forward to counteract an unwarranted rise in real rates. On financial projections they feel few changes will be made to GD but 2021 inflaiton will be revised to 1.4%.
Soc Gen: expect the ECB meeting to iterate that it will use PEPP flexibility to counteract any sharp move higher in yields. They see the ECB not pushing against a repricing of the market due to improved fundamentals but only against a sudden move in yields when fundamentals are unchanged.
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