ECB: Dovish exit strategy to remain intact – Deutsche Bank

Analysts at Deutsche Bank suggest that the next test for the bond market will likely come with this afternoon’s ECB meeting, followed closely by President Draghi’s press conference and their European economists expect the “dovish exit” strategy to remain intact.

Key Quotes

“They expect the ECB to retain confidence in the above-trend growth despite the recent loss of momentum (although the PMIs and Bank Lending survey this week should install confidence) and they expect the optimism – which increasingly extends to inflation – to remain conditional on the ECB being patient, persistent and prudent with stimulus. They also expect the ECB to signal ample monetary stimulus after QE ends.”

“In light of a core unchanged message then, the risk is that Draghi errs on the side of caution today. As our colleagues point out, the ECB is already highlighting the relative importance of policy rates and guidance post-QE. Draghi recently said that policy adjustments would proceed at a “measured pace” and conditional on the scale of the inflation gap and the uncertainties around the output gap and wages. The team expects Draghi to repeat this in the Q&A, but a more dovish outcome would be inserting “measured pace” into the press statement to strengthen forward guidance.”

“Another dovish move would be recognition of risks by “monitoring” economic developments. Our economists still expect the ECB to pre-announce in June that QE will end in December after a taper in Q4, but the risk is that the ECB waits until July to announce something. A one-month delay shouldn’t impact the prospect of a likely Q4 taper though. Beyond this and as a reminder, DB’s base case is for the first policy rate hike to come in June 2019 – a 20bp deposit rate hike and 25bp refi rate hike. A second hike is forecast for December 2019. Today’s ECB meeting outcome is at 12.45pm BST and Draghi is due to speak at 1.30pm BST.”