What can we expect from the European Central Bank this week?

Hussein Sayed, chief market strategist at FXTM, said ECB president Mario Draghi is facing challenging times given the opposition from some members of the Governing Council, which is likely to make this meeting the most notable in several years. 

He said: "The euro will move according to how aggressive the easing package comes. A monthly purchase programme of €30bn-€40bn a month may satisfy bond traders who have pulled yields to record lows in recent weeks, and that is likely to put further pressure on the euro versus the dollar, sending it below 1.09.

"A bond purchase programme less than that will disappoint bond traders."

David Lafferty, chief market strategist at Natixis Investment Managers, said he is expecting a cut of between 10 and 20 basis points.

"A cut of 10 bps seems somewhat more likely if only to mitigate the pain on banks and preserve some ammunition should the economy weaken further," he said.

Following its meeting in August, the ECB asked relevant Eurosystem Committees to examine ways to reinforce its forward guidance, develop mitigating measures, such as a tiered system for reserve remunerations, and options for the size and composition of possible new net asset purchases.

Giacomo Barisone, managing director of sovereign ratings at Scope Analysis, said: "Survey forecasts on inflation expectations have fallen in the euro area - on a five-year-ahead basis to 1.7% in Q3 2019. This means an accommodative stance by the ECB is likely warranted.

"However, at this stage, the ECB will need to be mindful of the diminishing returns to growth and inflation from its policies and preserve available instruments for the future should economic conditions deteriorate more severely."

There are areas of resilience in the economy that suggest ECB policy makers should ease, but with caution.

Unemployment in the euro area was down to 7.5% in June, while wage growth rates are above historical averages.

In July, headline inflation was 1.1% year on year, while quarter-on-quarter growth in Q2 slowed to 0.2%.

Bariscone added: "Under these circumstances, the ECB will not end unconventional monetary policy, with main refinancing rates set to remain at 0% at least through end-2020.

"A return to QE is moreover probably more of a question of when, rather than if, even if self-imposed purchasing limits would likely have to be revised in that instance."

Capital Economics has hinted that further QE measures are not likely to be introduced until the Autumn following July's sharp bond market rally.

Andrew Kenningham, the firm's chief Europe economist, said: "When the ECB does relaunch QE, which we think will be in October, we suspect that it will buy €30bn per month for a two-year period.

"Half of these purchases will be of corporate bonds, i.e. relaunching the corporate sector purchase programme, which was originally launched in March 2016."

According to Lafferty, any monetary stimulus is likely to be underwhelming and have a modest impact on the real economy.

He added: "Banks may enjoy some relief as we expect the ECB to outline a deposit tiering method. If deposit tiering comes with sufficient details and size, this could be a real shot in the arm to European bank stocks, although its impact on the real economy will be modest.

"Most estimates are for the ECB to renew asset purchases in the €25bn-€50bn per month range. With few assets left to buy, we suspect this will underwhelm too, closer to the €25bn level.

"Perhaps the greatest market risk is that the ECB does not announce an expansion of the QE programme at all. This is possible, but risky given expectations, so we think something smaller is more likely than nothing."

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• Topics
• Europe
• Markets
• deposit rate
• Hussein Seyed
• FXTM
• Andrew Kenningham
• Giacomo Barisone
• Scope Analysis
• Europe
• European Union
• European Central Bank
• eurozone
• european equities
• quantitative easing
• fiscal stimulus
• interest rate
• Capital Economics