Commerzbank preview of the European Central Bank monetary policy meeting on Thursday (20 July 2017)

Before Commerz jump into their preview they discuss labour market developments in the Eurozone. It's a detailed piece, but in (very) brief, what it means for the Thursday meeting:

  • ECB President Draghi can be expected next week to refer once again to the high level of hidden unemployment in the region
  • differences between individual euro zone countries
  • Labour market tightness only exists in the core countries, which is why wages and prices in these economies can be expected to begin slowly picking up.
  • Rate hikes will not be on the agenda for a long time yet.

(bolding mine)

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OK, and so for the preview proper:

ECB Council: Towards the exit at a snail's pace

  • At their meeting on Thursday, the ECB Council may well hold the first in-depth discussion about the further course of monetary policy in the coming year.
  • But no concrete decisions are to be expected.
  • It is likely that the central bank will only drop the option to further raise the monthly bond purchasing volume.

... We expect no quick decisions, as Council members' opinions still seem to differ greatly regarding the details.

High confidence concerning economic growth contrasts with trends in longer-term inflation prospects that are unsatisfactory from the ECB's perspective. ...

  • Moreover, the Council is under pressure because it has said that it wants to decide about monetary policy for 2018 no later than the October meeting and also because the bond purchasing programme will reach its self-imposed limits next year unless purchases are reduced.
  • On the other hand, a number of Council members are reluctant to give further exit signals, because the signals that were given triggered exaggerated market reactions (so far as the ECB is concerned)

For July, the Council had reportedly planned to drop the option to "increase the programme in terms of size and/or duration" if necessary.

  • It is now far from certain that any decision can be made in this regard because several Council members found the market's reaction to the gentle exit signals in Draghi's Sintra speech too extreme.

We assume that a compromise will be reached and that the ECB will at least abandon the option to raise the monthly purchasing volume above the current level of €60bn.

  • After all, an increase seems highly unlikely given the very robust economic growth.
  • Moreover, if the Council does not move at all now, it would run the risk of having to make an even sharper reversal of communications later.

Apart from this, the focus of the July meeting will likely be on exploring the different positions. ECB President Draghi will probably emphasise that the Council needs more information - and will likely point to the projections that will be available to the ECB at the September meeting.